Week in ReviewLast week experienced particularly high levels of volatility producing excessive price movements on a daily basis. Global equities eventually managed to rally last Friday after suffering five days of consecutive losses. Investor sentiment received a boost towards the end of last week after the USA posted impressive economic data and the energy sector rebounded with vigor. The financial markets were completely caught off-guard last Wednesday when the Swiss National Bank unexpectedly abolished its three year old Franc/euro cap without any prior warning. The ensuing currency tsunami wiped out many investors and even placed numerous Forex brokerages on the brink of closure. The primary US indices staged a recovery last Friday exemplified by the Dow Jones Industrial Average rocketing upwards by nearly 195 points; the S&P500 surging by almost 27 points and the NASDAQ climbing by 64 points.
At the end of a stressful week, the USA finally presented economic data which prompted traders to increase their risk appetite driving stocks upwards. A spate of key indicators was released disclosing that US consumer confidence rose during this month to register an 11 year high. A second survey demonstrated that national manufacturing output expanded for the fourth successive month by recording a 0.3% increase during December. These results certainly added credence to the viewpoint that the US economy continues to flourish regardless of major global geopolitical setbacks.
Nevertheless, despite these encouraging signs, the US Federal Reserve does not have a straightforward task in determining the optimum time to instigate its first hike in interest rates. This is because the US Department of Labor advised last Friday that its Consumer Price Index (CPI) had slide by 0.4% last month to post its largest decline in almost 6 years. During the last 12 months, the CPI has only risen by 0.8% producing its weakest annual growth rate since late 2009.
Prominent analysts summarized these developments by advising that the prospects of an interest rate hike in June 2015 are now quickly receding. This is because the Fed will be more focused on the worrisome performance of core inflation than on other more positive economic indicators. In addition, the US Central Bank will be further distracted by deteriorating global economic prospects.
Without question, investors were stunned last Thursday when the Swiss National Bank scrapped its 3 year-old Franc/euro upper limit without any advanced notification. The currency markets descended into such a freefall that major Forex brokers suffered harshly. For instance, Alpari UK filed for bankruptcy while FXCM advised that its clients had suffered over $200 million of losses.
What to Expect This Week
The following key global economic indicators will be released over the coming days. No data will be declared on Monday, which is a national holiday in the USA, i.e. Martin Luther King Day.
On Tuesday, China will present its Gross Domestic Product for the fourth quarter of 2014. Analysts are predicting that the current downward trend will be continued with a drop to 7.2% the favored outcome. Later, Germany will disclose a key economic sentiment gauge which is expected to expand for the third straight month in a row. Australia will complete the day by revealing a key Consumer Sentiment Index for this month. After a recent strong labor report, this figure should confirm an improvement in public optimism.
The Bank of Japan (BoJ) will launch Wednesday by announcing its latest Monetary Policy Statement. This event will be supported by a Press conference. After the Swiss Central Bank stocked the world last week, a similar surprise movement by the BoJ is not out of the question. The Bank of England (BOE) will then issue its latest forward guidance policy. With the European Central Bank poised to implement aggressive stimulus action, a pre-emptive strike by the BoE is now a viable possibility. The United Kingdom is also scheduled to release its Claimant Count Change for December. Expect consensus is predicting a minor slump this time around. Next, the USA will print its Building Permits and Housing Starts for last month and both should remain above their all-important 1 million handle, once again. Finally, the Bank of Canada (BoC) will post its Interest Rate decision. Although a ‘no change’ verdict is anticipated, the BoC may be forced into action if the other major Central Banks instigate any unexpected moves.
Thursday will witness the pivotal event of the week when the European Central Bank proclaims its latest quantitative easing policies. If the ECB fails to introduce any new measures, as widely expected, then the aftermath of such negativity could equate to that following the recent surprise move by the Swiss National Bank. The USA will subsequently publish its Initial jobless Claims report for last week. If this indicator records another result above 300k for the second sequential time, then fresh doubts about the true health of the US labor market could emerge.
Great Britain will disclose its Retail Sales for last month on Friday. After an impressive performance in November, a decline from 1.6% to minus 0.6% is currently the preferred outcome. The week will conclude with the USA presenting its Existing Home Sales for December. A second monthly print under 5 million could prompt a new bout of USD profit-taking.