Europe
The Eurozone officially fell into deflation on Wednesday but European markets were unperturbed, taking the data to mean improved chances of the European Central Bank introducing an asset price-boosting quantitative easing program.
Oil prices crashed below $50 but subsequently recovered as investors stepped in to try and pick the bottom at the big psychological round number. A hoax rumoured death of Saudi Arabia’s King Abdullah helped create initial spike in demand for oil around the $50 per barrel level.
European consumer prices were shown to fall -0.2% in December, worse than the -0.1% expected. The fact that we’ve moved from the threat of deflation to actual deflation gives Mario Draghi more firepower to push through quantitative easing. Draghi’s policy throughout has been to offer the possibility of QE should the data warrant it. The ECB head was surely hoping the data would never justify QE, but with this latest reading, it has.
The bad news wasn’t just economic in Europe as deadly shootings in Paris, not long after the hostage-taking in Sidney again highlighted the growing threat of Islamic extremism in the Western world. The worry in France specifically is that the shooting of innocents by religious extremists sends voters looking for answers from extreme political parties such Marine Le Pen’s anti-EU, anti-immigration Front National.
In the UK stocks bounced back despite the initial 4% jump in Sainsbury(J) (LONDON:SBRY)’s shares dissipating into a loss as global risk assets were looked upon more favourably after Brent crude oil pushed back above $51 per barrel.
Sainsbury’s Christmas sales fell less than expected demonstrating the beginnings of a return to growth but with rival Wal-Mart Stores Inc (NYSE:WMT) owned ASDA announcing further price cuts, the price war only looks like accelerating in 2015.
US
US markets opened higher on Wednesday on better than expected ADP data and the prospect of more soothing talk from Federal Reserve minutes which are expected to confirm the bullishness on the US economy expressed in the most recent FOMC policy statement.
The ADP employment reported showed an increase of 241k jobs in December, above 225k expected while November’s data was also revised higher to a level that beat prior expectations rather than missed them as first thought.
The US trade deficit narrowed more than expected in November to 39bn as falling oil prices and lower imports offset a decline in exports.
FX
The US Dollar was uniformly strong on Wednesday as safe-haven flows moved out of the Japanese yen but away from the euro which faces the increased chanced of devaluation through quantitative easing. The Norwegian krone recovered slightly alongside oil prices as Norges Bank officials and politicians tried to put a brave face on the impact of falling oil prices.
Commodities
The equity rally on Wednesday undid the safe-haven play in gold while silver still slightly outperformed its yellow metal counterpart.
Both Brent and WTI crude oil contracts have now dipped below $50 per barrel but the possibility of a change in OPEC policy stemming from the rumoured passing of the King of Saudi Arabia has enabled markets to push higher with Brent back well above $51 per barrel. $50 is a big psychological level so with prices having dipped below and flushed out any weak longs, there is a good chance of a bear market rally supported by a fall in US crude inventories.
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