20150107 – AS IN THE BOOK…

We got the new S&P 500 low I expected last night (but not much of a bounce), the ISM numbers in the United States certainly helped! The Institute for Supply Management (ISM) services index fell more than expected in December to its lowest level since June, but it still indicates that non-manufacturing expanded for the 59th consecutive month. We will need to monitor succeeding months to confirm that growth is not weakening, but for now growth remains robust. Perhaps of more concern is the rally in the bond market which has seen bond yields decline below 2%. Is the bond market telling us something about future growth? Personally I’m not concerned.. the bond rally has happened as equities have fallen from the highs so it could just simply be rotation; furthermore, across yearend, many investors are likely to have been liquidating stocks for tax purposes, bonds would be a natural home for the surplus cash; add to that the disinflationary impact of collapsing oil prices which make bonds more attractive; and finally the middle to back end of the US yield curve may not sell off quite as quickly as expected because you have to figure that Treasury supply is declining as the US fiscal position improves.

EUR/USD is back at recent lows, as is cable (GBP/USD), as I said yesterday this is more of a European thing right now, the US dollar is not rallying at the moment which is obvious when you look at other USD-G10 pairs like USD/JPY and NZD/USD. We expect the pressure on the euro to continue because of the risks inherent in the Greek election results on January 25th. As for the pound sterling, the UK services PMI dipping to a 19 month low was the main culprit, although pressure on the euro always adversely impacts GBP as well. We have to acknowledge the fact that the UK economic recovery is slowing, this has been the case in the last few months, but it really shouldn’t be a surprise. The Eurozone is by far and away the largest market for the United Kingdom, it is simply unreasonable to expect the UK economy to chug along with no impact from the stagnant economic conditions there.

This morning Brent crude for February delivery has briefly dipped below $50, and it would take someone far more optimistic than me to imagine we don’t spend a decent amount of time below that level today. It’s safe to assume that oil exposed currencies like the Russian rouble, Norwegian krone, Mexican peso and naira to name a few will be under pressure again in the very near future. Lower oil prices are overwhelmingly good news for consumers as cheaper pump prices will mean more money in the pocket, but the potential for systemic events becomes greater as this energy price decline persists. Already there are concerns about the loan book of Nigerian banks which is dangerously focussed on the oil & gas sector there. I wonder where else we should be concerned? I guarantee you there will be pockets of risk which will be brought to light in the months ahead, we can only hope that these issues are distributed enough to enable us to avoid global systemic risk events.

Some data out this morning.. slightly better employment data out of Germany with the unemployment rate decline from 6.6% to 6.5%, a slight surprise. Can’t say the same about Italian data though… 13.4% versus 13.3% previously, perhaps as in the book of Job (how’s that for irony!) “The Lord Gave, and the Lord Hath Taken Away”. Talking about employment data though.. we get the ADP measure this afternoon in the United States which should set us up for the main data event of the week, the US non-farm payrolls report on Friday. We should get some Italian inflation data later on this morning, which will probably depress us even more, that country really looks like the ugly step child of Europe right now, but for once they appear to have a dynamic leader, perhaps it’s always darkest before the dawn? At the same time as the Italian inflation data comes out, we should get a flash Eurozone number as well. This, along with US non-farm payrolls is the key data event of the week. Economists expect an unchanged +0.7% core year on year CPI number… there’ll be hell to pay if it surprises to the downside. Look out for our tweets, if anything really interesting happens we’ll let you know via that.

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