Oil having been the main driver of most of the market price action of the past two weeks, it was Friday’s near 10% rebound that was the catalyst for much of Friday’s retracements and following on from Thursday’s moves inspired by the prospect of additional ECB easing action as early as the March Council meeting.

The oil rally looks to have been as much a function of blizzards hitting the east coast of America as the prospect of more central bank largesse or comment from Saudi Arabia’s oil minister that sub-$30 oil was ‘irrational’.
In currencies, unsurprisingly it was the commodity export dependent EM currencies that fared best on Friday (e.g., RUB +5.6%, MYR +2.07% and MXN +1.6%). In G10, the CAD fared best (+1.04% to 1.4119) and JPY worse (-0.91% to Y118.78) while the AUD finished pretty flat at 0.7002 after strong gains on Thursday and NZD lost 0.57% to 0.6493.

EUR/USD maintained its pedigree of falling in a risk-positive environment (carry funding currency attractions back on display, down 0.72% 1.0796). ECB president Draghi also added to his message from the previous day’s ECB meeting press conference, saying in Davos that “on inflation things are different. Certainly the situation gives less reason to be optimistic for the time being”.

US stocks closed near the highs Friday, the S&P500 +2.03%, the Dow +1.33% and the NASDAQ +2.66%. The VIX lost 4.35 points, down to 22.34. In US Treasuries, 10yr yields rose by 2bps to 2.05%.
Commodities saw Brent crude +$2.93 to $32.18 and WTI +$2.66 to $32.19. The LMEX index added 0.18% and iron ore gained 91 cents to $42.20. Gold lost $3.25 to $1097.95 so slipping back off the $1,100 handle achieved on Thursday.

Data wise, US existing home sales rose by a stronger than expected 14.7% (+9.2%E) after November’s 10.5% drop, the latter seen to be the result of new mortgage disclosure rules. The Markit version of US manufacturing PMI rose to 52.7, up from 51.2 and better than the 51.0 expected.

Earlier the EZ PMI composite slipped to 53.5 from 54.3 and beneath the 54.1 expected, with manufacturing 52.3 (53.0E, 53.2P) and services 53.6 (54.2E, 54.2P). UK retail sales were weak, headline -1.0% m/m (-0.3% expected) and ex auto fuel -0.9% against -0.3% expected.

Canadian retail sales greatly exceeded expectations, +1.7% m/m (+0.4%E) and ex-autos +1.1% (0.2%E) while CPI came in a bit below on the core measure (0.1%m/m vs. +0.2% expected, to pull the annual rate down to 1.9% from 2.0%. Headline was +0.1% as expected but y/y only went up to 1.6% from 1.4%, not the 1.7% expected.

Coming Up

A big week ahead, mostly not starting until after Tuesday’s Australia Day holiday though the first NAB business survey of the year is due this morning and will certainly be of keen local interest. In the last survey, business conditions printed at +10 and business confidence at +5.

This comes in front of Australia’s Q4 CPI prints on Wednesday and where both the trimmed mean and weighted median core measures favoured by the RBA are both seen +0.5% on the quarter. This would mean 2.1% y/y for the trimmed mean measure (unchanged) and also 2.1% for the weighted median (down from 2.2%). Headline CPI is seen +0.3% for 1.6% y/y up from 1.5% in Q3.

The FOMC’s first meeting of the year comes on Wednesday – so the outcome in the early hours of our Thursday morning. Though no change in the fed funds rate target is a given the language surrounding recent market events, global growth issues and domestic inflation expectations, will all be of keen interest. We suspect the Fed will not want to appear overly dovish in its statement for fears of adding to the prevailing market pessimism about the (global) economic outlook.

Then on Thursday we’ll get the outcome of the RBNZ’s first policy meeting of the year. Again, no change expected at this juncture but the language will be market sensitive.

The BoJ meets Friday with its decision due hot on the heels of the latest (December) CPI, retail sales and industrial production data. On balance we expect no change to the current ¥80tn annual QE pace, but a likely downgrade to inflation projections will have some suggesting the BoJ is limbering up for a possible change a little later in the year. We can’t completely rule out a ‘surprise’ easing this week though, after BoJ Governor Kuroda speaking in Davos said that inflation expectations have taken a bit of a hit, that 2/3rds of the government bond market is still not yet bought by the BoJ and that if necessary to reach its (inflation) target, the BoJ can expand QE.

To cap the week we’ll get the first estimate of US Q4 GDP on Friday. Market estimates have been tumbling in the past week or more, with the current consensus sitting at just 0.8% (annualised growth) not far from the Atlanta’s Fed’s latest GDPNow’ forecast for 0.7%.

Overnight

On global stock markets, the S&P 500 was +2.00%. Bond markets saw US 10-years +2.08bp to 2.05%. On commodity markets, Brent crude oil +10.02% to $32.18, gold-0.2% to $1,096, iron ore +2.2% to $42.20. AUD is at 0.7002 and the range since Friday’s local close has been 0.6995 to 0.7046.

For full analysis, download report:

• Markets Today: 25 January 2016 (PDF,274KB)

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