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Markets mixed ahead of Fed

By David Madden

Stocks markets in Europe had a disappointing session yesterday as investors were worried about global growth.

The macro outlook didn’t change much, but traders remained wary about the soft economic indicators out of Asia and Europe recently.

There was further proof that investors are concerned about the state of the German economy as the IFO business climate reading dropped from 102 in November to 101 in December – its lowest reading in over two years. The powerhouse of Europe is undergoing an economic slowdown, and this doesn’t bode well for the region. France’s economy has been dented by the protests, and the Italian budget situation is still unresolved.

US markets enjoyed a sizeable bounce back in the middle of yesterday’s session, but the Dow Jones only managed to eke out a small gain by the end of the day. The S&P 500 just about ended the day in positive territory. The fact markets couldn’t hang onto the earlier respectable gains is a worrying sign. Dealers are nervous about the Federal Reserve’s interest rate decision, and President Trump’s threat to shut down the government over funding for the Mexican border wall is a factor too.

Asian equity markets were mixed as investors in the Far East weren’t given much inspiration from Wall Street. Shares in SoftBank Group’s mobile unit, SoftBank Corp, lost ground in its first day’s trading.

The Federal Reserve meeting will be the highlight of the session, and the central bank will release its decision at 7pm (UK time), and the statement will follow at 7.30pm (UK time). The markets are pricing in a high probability of a 0.25% interest rate hike. The mood has changed considerably in the past two months. In October, traders were bracing themselves for two or three hikes in 2019, and now they aren’t pricing in any for hikes next year. In a way the US central bank have boxed themselves in, and they almost have to deliver a rate hike today, otherwise it would send out a very negative message.

Yesterday, the US housing sector reported some positive data, which balanced out the disappointing National Association of Home Builders report on Monday. Building permits ticked up to 1.32 million, exceeding the forecast of 1.25 million. The housing starts edged up to 1.25 million, and the consensus estimate was 1.22 million. The US housing market has become a bit overstretched recently, and the prospect of higher borrowing costs is a factor.

Oil prices tumbled again yesterday over reports that Russia are increasing output to 11.42 million barrels per day ,and should that be confirmed , it would be a record level. Both WTI and Brent Crude took out their respective recent lows on the back of the Russian production chatter. OPEC and partners announced a planned coordinated production in early December, but the individual countries have a record of suiting their own agenda. The American Petroleum Institute report last night showed that stockpiles rose by 3.5 million barrels. At 3.30pm (UK time), the Energy Information Administration will release the latest oil inventory figures, and the consensus estimate is for a decline of 2.47 million barrels.

At 9.30am (UK time) the UK will announce the November CPI report, and economists are expecting the headline figure to dip to 2.3% from 2.4%. Recently we saw that UK average earnings grew by 3.3% – its highest rate in 10 years, the cost of living is tipped to fall, and that should provide a boost to the British worker and they are receiving a real increase in wages. Usually, when workers earns more they spend more, but the latest update from UK retailers suggests otherwise. The core CPI reading is tipped to decline to 1.8% from 1.9%, so that might explain that fall in underlying demand.

Canadian CPI will be released at 1.30 (UK time) and the headline inflation figure is expected to undergo a big fall to 1.8% from 2.4%. The core reading is tipped to dip to 1.5% from 1.6%. The slump in the oil market is likely to have a big impact on the cost of living in Canada, and the core report is a far better gauge of true demand in the economy.

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance at 1.1490 – the 100-day moving average.

GBP/USD – bullish engulfing might see a move back towards the 1.2750 region. Another move lower might bring 1.2365 into play.

EUR/GBP – the bearish engulfing might drive the market to the 200-day moving average at 0.8840. If the wider rally continues, it might target 0.9100.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 112.39 – 100-day moving average.

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