Global Markets Update – 12/16/13

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By Evan Lucas, IG Markets Strategist | December 16, 2013 10:22 AM EST

The week of central banks

With eight days to Christmas and only six and a half trading days left of 2013, you would hope trade would be settling down as investors set and forget, and put their feet up and enjoy a summer holiday. However, this looks to be wishful thinking; the week ahead is packed full with market-moving material.

This week could be one of the busiest, most market changing weeks of the year. There are at least four central bankers on the wires, and possibly the biggest FOMC meeting since the September 2012 when QE3 was enacted.

Going hand-in-hand with this public policy 'chatfest' is macro data. Japan is releasing both manufacturing and non-manufacturing TANKAN indexes, and considering last week's call from the BoJ that 'until inflation is stable at 2%', look for growth in both indices or expect more rhetoric come Friday in the BoJ minutes and press conference as it looks for 'stability'.

The heavily-watched HSBC flash manufacturing data from China is released today. considering we are under four weeks from the fourth quarter GDP print and inflation has been well below official estimates, I would expect a slightly larger expansion read and if not talk of possible easing to reach these official targets.

Europe will see French, German and Italian manufacturing data followed by a press conference from Mario Draghi who is becoming more and more hawkish by the day. This is moving the EUR higher and higher by the minute.

But really there is only one thing that matters this week and that is the FOMC meeting starting Wednesday for those of us on the eastern side of the world.

The markets will likely change tact come 6:00am AEDT on Thursday when the decisions around monetary policy are read out. There are several specific markets to watch this week leading into Thursday morning. 

Gold is one; tapering is starting to be priced in and on a medium- to longer-term point of view gold is heading one direction - and that is lower. However, on Thursday it may pop if monetary stimulus is not unwound; a short-term bounce through US$1250 an ounce and even up to US$1300 an ounce is on the cards, as stops are triggered and the statement remains dovish and with no direction as to when it could be unwound. Gold has been trounced this year; however it may have a Christmas rally on the Fed data.

The US bond market is the other major market to watch. Ten-year notes have moved up 36 basis points to 2.86% from the October low, as two months of employment data saw tapering bets increasing. The yield hit 3% two days before the September meeting when everyone but the Fed though monetary stimulus should be unwound; if they don't taper, these bets will be unwound and fast.

What we do know is this; the US has had the best two months of employment data since late 2012; the employment change is over the Fed's threshold number of 200,000 jobs added a month, and this strength looks to be continuing into the New Year. The other major difference between December and September is that fiscal policy has been passed for the first time in three years, sequester cuts have been eased and the threat of a government shutdown and a non-move on the debt ceiling have abated - these are all net positives from unwinding.

However, inflation is almost half of where the Fed wants it to be and could be a drag.

Other hurdles include forward-guidance, which still has not been agreed upon, coupled with the fact that Janet Yellen is yet to be sworn in; for this reason I am still in the camp that believes no movement will occur on Thursday.

Finally it's only two months of data and I believe it will want to see at least a quarter of employment data before it reacts. It's a tight call considering the communication from members has being varied and inconsistent; who knows how many voting members have changed their views over the past month, however I don't think there has been enough data to change enough of them.

Ahead of the Australian open 

Having finally broken the downward spiral on Friday, snapping a six-day losing streak, the ASX looks like it is finally finding support. However, ahead of the open, the ASX 200 is pointing south to start the week down 24 points to 5074; it could give back most of Friday's gains as the market looks to position itself for a very rough week ahead.

The release of the monetary policy minutes tomorrow will be interesting as the RBA and Glenn Stevens continue their mastery of jawboning the AUD lower. Any hint of green shoots will see the short in the AUD unwinding, however considering Stevens is speaking on Wednesday I would assume he will announce something that will push it back down if it pops up on tomorrow's release.

Trade today will be dominated by Asia, with the flash read from China and the TANKAN indexes from Japan; the AUD and cyclical stocks are the markets to watch as we look to start the week on a downer; let's hope we see some green on screen.

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