Crude prices to continue to suffer
Japan’s Abe a winning cert on Sunday?
No U.S inflation pressures along supply chain
More Central Banks to apply pressure next week
Investors have just completed navigating through a week not for the faint-hearted. A week peppered with new record lows for crude (WTI +$58.80, down -10% on the week and -20% m/m), the Russian rouble ($57.98, down -44% year-to-date) and a massive scramble to own less risky assets like U.S treasuries (10’s +2.125%) and Bunds (10’s +0.638).
Anything oil related has suffered, be it equities or commodity sensitive currencies (CAD, NOK, AUD, RUB). Current market sentiment and price action would suggest that both dealers and investors are happy to continue to exert fierce downward pressure on oil dependent stocks and currencies. The crude bears have managed to gather some additional support on Friday from the International Energy Agency. The IEA has again cut its 2015 demand growth forecast by another -230k bpd to +0.9m bpd (this is the fourth cut in five-months) and noted that the sharp decline in oil prices would not hit production and boost demand in the short-term.
In addition to oil, China is appeared on many individuals “negative” radar. The newly crowned world’s largest economy is not great. Data this week revealed that factory production slowed more than estimated in November (+7.2% vs. +7.7%). Weak data usually fuel’s a market bet that further stimulus could be in the offing. Who can forget the surprise November cut from the PBoC? Nevertheless, it seems that global equities on Friday seeing ‘red’ are not buying into that particular scenario just yet.
Where to hide?
The U.S dollar is making an effort to end the week stabilizing itself against other major currencies ahead of Japan’s general election on Sunday. Japanese polls are currently indicating that PM Abe’s ruling party would win an overwhelming two-thirds of the lower house seats. If so, the market will expect the current form of Abenomics to continue. The event risk is that the polls are wrong and whether USD/JPY has the results already priced in (118.30).
By Monday the market focus will quickly shift to U.S economic conditions and FOMC meet mid- week. The question to be answered is “if and how” the Fed officials would signal a rate hike by dropping their assurance that rates will stay low for a “considerable time.”
The inflate and deflate debate
The big decline in oil prices is about to take a massive bite out of already weak inflation in major nations. Analysts expect that the average inflation rate amongst the G7 members is likely to fall to around +1% in 2015. Investors should be expecting a number of economies to experience outright deflation. If the ECB thought it had low-price problems now, wait until the effect of crude prices filters throughout their economy.
On Friday, the U.S. reported that November’s PPI for final demand fell -0.2%, m/m, while the core measure (ex-food and energy) was flat. The result reversed October’s numbers, but remains in line with year-over-year expectations (headline +1.4% and core at +1.8%). Excluding plummeting crude prices, there is little evidence of any inflation pressures along the U.S. supply chain.
On tap for next week
With most of the major event risk out of the way for this month, except for the FOMC two-day meet and the Japanese election results, investors should now be expecting the market pace to subside a little. Nevertheless, a number of Central Banks will still have the opportunity to apply some pressures to their respective currencies and domestic yields if they so desire.
The RBA releases its Monetary Policy Minutes on Monday; the BoE’s Governor Carney discusses U.K’s bank stress test results on Tuesday, and the “Old Lady’s” official rate vote on Wednesday. The Fed delivers its statement, rates and economic projections on December 17, along with Ms. Yellen’s obligatory press conference in the afternoon. The BoJ and Governor Kuroda follows suit at the end of the week.
Nevertheless, the deeper we go into the month; both liquidity and volatility will become more of a heightened issue with or without economic releases. Capital markets should expect that most of the risk-averse investors to continue to wade to the sidelines, while year-ending U.S dollar squaring to become more of a dominate issue as we approach the “turn.”
MarketPulse Calendar
WEEK AHEAD
* CNY New Yuan Loans
* JPY Tankan Large Manufacturers Outlook
* GBP Consumer Price Index
* EUR German ZEW Survey (Economic Sentiment)
* GBP Bank of England Minutes
* USD Consumer Price Index
* USD Fed Summary of Economic Projections
* USD Federal Open Market Committee Rate Decision
* NZD Gross Domestic Product
* CAD Consumer Price Index
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