Equities short sellers enjoyed one of the best trading weeks as stocks continued to plunge from Asia to America, and tensions continue to escalate as markets in countdown for Fed decision. Last week traders could sense the fear in markets, with red screens everywhere, oil prices indicating deflation, high-yield debt selloff at high levels, and volatility index shooting 26% only on Friday.
U.S. equities selloff led by the energy sector as WTI broke below $36 per barrel to trade at lowest levels since February 2009. This led credit default swaps (cost of insurance) on high yield energy corporate bonds to surge to highest levels in three years and markets started becoming worried of the contagion effect that could spread into other sectors. For instance, the financial sector supposedly the major beneficiary of any suspected rate hike dropped 5.4%.
Investors focus this week will shift squarely on the Fed’s decision as markets are anticipating a 79% probability for a rate hike on Wednesday. Probably, it is not the ideal situation Janet Yellen looking for to start lifting. However, a delay in lift-off will create more noise and confirm to investors that the world largest economy is not on the right path. That is why markets are anticipating a dovish hike, meaning that the Fed will increase rates by 25 basis points, but deliver a statement that is sufficiently weak to avoid further turmoil in financial markets. The Fed is likely to continue stressing that further hikes will be data dependent but it would be interesting if Fed members drop down the dots on the dot chart to indicate a slower tightening cycle than previously expected.
Traders do not seem to be bullish on the USD as CFTC figures indicate long futures contracts dropped in the week through Dec 8 and the EUR closed the week higher as Mario Draghi failed to convince markets that the central bank would do what it must to lift inflation. FX traders should continue to focus on equity markets heading to federal reserve meeting as further selloff in stocks will push the EUR higher against its major peers.
The CAD continued to be dragged lower as oil prices plunged. The commodity currency dropped to lowest levels in more than a decade as USDCAD tested 1.3754 on and the lower prices of oil go from here the more pressure the CAD will feel, likely heading towards 1.4 in the short term.
Next week economic data (GMT):
Tuesday 15 December
12.30am – RBA meeting minutes: watch for further discussions of monetary policy. Market to watch: AUD crosses
9.30am – UK CPI (November): core inflation expected to rise by 1.09% YoY, while overall inflation rises 0.4% YoY and 0.05% MoM. Market to watch: GBP crosses
10.00am – German ZEW (December): current conditions index expected to rise to 54.8 from 54.4, while the economic sentiment index increases to 15.1 from 10.4.Market to watch: eurozone indices, EUR crosses
1.30pm – US CPI (November): core prices forecast to rise by 1.9%, in line with October, while headline prices expected to rise 0.3% YoY from 0.2%. Market to watch: USD crosses
Wednesday 16 December
8.00am – 9am – French, German, eurozone mfg PMI (December, flash): these are expected to show modest increases over the previous month, potentially providing support for the euro. Market to watch: EUR crosses
9.30am – UK unemployment & wage data: the November claimant count is expected to rise by 1900, from 3300 last month, while the unemployment rate ticks up to 5.5% for October, from 5.3% in September, average earnings expected to rise by 2.7% in October from 3% in September. Market to watch: GBP crosses
10am – eurozone inflation (November, final), trade balance (October): core prices forecast to have risen by 0.9%, while overall inflation rises by 0.1% YoY. Trade balance expected to see surplus rise to €23.1 billion from €20.5 billion in September. Market to watch: EUR crosses
1.30pm – US housing starts & building permits (November): building permits forecast to rise by 4% MoM, while housing starts to fall 9% MoM. Market to watch: US indices, USD crosses
2.45pm – US mfg PMI (December, flash): the first estimate is forecast to show an increase in activity, with the index rising to 53.26 from 52.8. Market to watch: US indices, USD crosses
3.30pm – US crude inventories: after last week’s drop, stockpiles expected to rise by 300K. Market to watch: US light crude
7pm – Fed interest rate decision: the big moment finally arrives, with the Fed finally expected to raise rates to 0.5% from 0.25%. Watch for further clues about the future path of policy in the statement and press conference. Market to watch: all major indices, FX crosses, commodities
11.50pm – Japan trade balance (November): this is forecast to show a deficit of Y294 billion, from a Y111 surplus in October. Market to watch: Yen crosses
Thursday 17 December
9am – German IFO (December): business climate index to hold at 109, and expectations index to remain at 104.7. Market to watch: eurozone indices, EUR crosses
9.30am – UK retail sales (November): consumer spending forecast to rise 0.4% MoM from a 0.6% fall in October. Market to watch: GBP crosses
1.30pm – US initial jobless claims, Philadelphia Fed (December): claims to fall to 279,000 from 282,000, while the Philly Fed index rises to 2.9 from 1.9. Market to watch: US indices, USD crosses
Friday 18 December
4am – BoJ interest rate decision: rate to stay unchanged at 0%, while watch for any commentary on changes to policy. Market to watch: Nikkei 225, Yen crosses
1.30pm – Canadian CPI (November), retail sales (October): price growth expected to be 1.06% YoY and 0.11% MoM, while core prices rise 2.1% YoY. Retail sales to rise 1.88% YoY and 0.5% MoM. Market to watch: CAD crosses
2.45pm – US services PMI (December, flash): activity expected to increase, with the index rising to 57.1 from 56.1. Market to watch: US indices, USD crosses