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US data has been fairly robust this week and judging by the fact the S&P 500 has closed lower for the past five days, there is increased expectations for a solid number in today’s US payrolls report. The fact that we’ve also seen the VIX index (volatility index) up for eight straight days suggests a number of the equity bulls have preferred to protect portfolio holdings through the purchases of put options, rather than selling their underlying holdings.
170,000 to 180,000 jobs seems about right
The print itself is usually a wild guess, as rarely does economic modelling accurately predict the actual number; and we’re likely to see reasonable revisions to the prior two months. But using the powers of probability from the usual lead-in indicators, a number between 170,000 to 180,000 seems about right. This will not be enough to cause a December taper, but will probably be the most friendly outcome for the equity market – not too hot, not too cold is the line the equity bulls want to run with. The tricky (albeit highly unlikely) scenario occurs if we see a number north of 240,000. In this case the US ten-year pushes to 3%, with the yield curve continuing to balloon, however it’s the front end of the curve that the Fed will hope doesn’t react too much. The USD should rally hard in this environment; however that hasn’t been happening in the last couple of days, with the likes of USD/JPY and USD/CHF exerting a stronger correlation with the falls in global indices.
We also get speeches from Fed members Charles Plosser and Charles Evans (not to mention Alan Greenspan) after the print, so traders will be keen to hear how these two Fed officials viewed the jobs data.
Asian indices mostly lower
Looking around the region, the trend is modestly lower in equity markets, while tight ranges have been seen in the G10 forex space, with traders tidying positions ahead of the upcoming non-farm payrolls. The ASX 200 is down 0.2% and price action continues to favour further downside, especially with the short-term downtrend seen in the financial sector. There’s been some added nervousness given QBE’s trading halt and what exactly they have to say, although most feel this will have limited bearing (if any) on the broader market. Technically the index has pushed into a ‘sell on rallies’ candidate with momentum indicators (like the MACD) falling below zero and the different short-term moving averages now aligned and headed lower. Another weak tape in the Europe and the S&P 500 and we could see support kick in at 5142 (the 38.2% retracement of the 17% rally seen from June to October).
Europe once again faces a flat open and once again Asian markets are failing to put in any kind of volatility into overnight futures markets. The DAX did react negatively to the ECB meeting and Mario Draghi’s press conference, while EUR/USD closed above solid supply at 1.3628 (the 38.2% retracement of the October to November sell-off) and continues to print high highs. EUR/AUD looks fantastic from the long side, although is showing signs of divergence; but for now traders are pointing to the break-out and is now trading at the highest levels since May 2010.
ECB keen to see the upcoming stress test
We were always going to get tweaks to the staff’s (ECB’s) economic forecasts; however the key for me was whether the bank is any closer to utilising its range of non-conventional measures and what sort of thresholds warrant a move. The fact EUR rallied to 1.3674 is testament to the fact that while the ECB see inflation at 1.3% in 2015 (still a sizeable 70 basis points below its target), at least it’s going in the right direction after printing 1.1% in 2014 – in their view. Whether their estimates will be correct is debateable, however the fact inflation is going in the right direction suggests they will be sceptical about undertaking unsterilised bond purchases, negative deposit rates or another LTRO (long-term refinancing operation) in the near-term. On the subject of another round of liquidity, the fact Mario Draghi stressed one of the key reason Japan has faced such sizeable headwinds for so long was because of the huge build up in in its banks balance sheets, suggests the barriers to another round of balance sheet boosting liquidity is also high. So in theory this really says to me that the ECB is keen for next year’s asset quality review (AQR) and stress tests, and is welcoming the fact that banks are deleveraging (if Japan is a lesson they are happy to learn from).
Given the ECB’s stance, or more the lack of easing options at hand, the EUR could outperform from here, although underperformance from the DAX, CAC, IBEX or MIB would be a risk to that call, given the potential for EUR outflows. In today’s trade we get the latest German factor orders and once again will see the on-going divergence between the economic performance in Germany and that of Italy and France and this theme will continue to be one of my key issues for 2014 and how it loops back to politics. With French unemployment (released yesterday) approaching the record highs seen in late 1997, this divergence has to be something on trader’s radars for next year.