Markets rally heading into payrolls

Equities are rallying into the weekend with Europe turning things around having generated some volatility earlier in the week.

ECB
Source: Bloomberg

Additionally, oil prices have found some stability with a rebound helping to calm investor nerves. Investors continue to speculate on European Central Bank action and comments by ECB President Mario Draghi in a letter to lawmakers suggesting ECB measures may include sovereign bond purchases fuelled this notion further. The euro came under further pressure with EUR/USD trading to a low of $1.1754 before recovering some ground. While the pair is back above $1.1800, it is likely to continue to experience some downside pressure particularly on any recovery. On the European calendar today we have French and German industrial production due out along with trade balance numbers for the two countries. In the UK, we have manufacturing production, trade balance, construction output and industrial production.

DAX the one to watch in 2015

Ahead of today’s session we are calling the major European bourses lower with equities giving up some of yesterday’s huge gains. While most commentary has been around the periphery with Greek political issues dominating headlines, it’ll be interesting to see how all these developments play out for the DAX. This is one market I feel could be in a strong position this year considering a lot of factors are working in favour of the German economy. From a value proposition perspective, the DAX is expected to show growth of around 9.2% and is on a P/E of around 16.6 times. Several factors could work in favour of Germany starting with the weaker euro, net inflow into bunds and weaker commodity prices. Its big manufacturing base is likely to benefit from all these factors with exports ramping up. Additionally the ECB will be looking to expand its balance sheet along with TLTROs helping liquidity. All this considered and after some guidance from the ECB when it meets later this month (January 22), I wouldn’t be surprised to see the index venture above 10,000 again in the not so distant future.

Energy stock rebound

The ASX 200 has taken off today and investors even largely ignored a disappointing retail sales number. A rebound in energy stocks has been the highlight as they respond to the recovery in oil prices. Whether this is a sustainable recovery remains debatable as the demand/supply issues facing the crude oil market are still very real. As much as its positive these stocks are up today, they could easily just be deep in the red come next week. The medium term proposition for the energy space remains extremely challenging. Materials are enjoying some relief with the recent moves in iron ore encouraging investors to do some bargain hunting in the sector. The price action in the pure plays remains choppy though with some disjointed moves across the board. AUD/USD has been a beneficiary of the rebound in commodities and has since popped back above the $0.8100 handle -  it’s now trading at around $0.8143. While there isn’t much going on in the AUD side of the equation today, activity will ramp up on the USD side with non-farm payrolls data due out later. The Fed has reinforced the data-dependency of rates lift-off and therefore releases will carry significant weight. The market is expecting 241,000 jobs which is a big drop off from the previous month’s 321,000 reading but anything above 200k particularly in December is a strong reading. The unemployment rate is expected to fall to 5.7%. Investors also took comfort in Fed member Rosengren’s comments suggesting patience on rates is warranted. As inflation undershoots, the next tightening cycle may be bumpier than in the past.

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