Global markets are primed for volatility

Markets around the globe are bracing themselves, as we draw nearer to critical macro news flow in the coming days and weeks.

Equity markets were relatively quiet last week, following the US Thanksgiving holiday, however, this week’s data could make it or break it for US interest rates (and therefore all other asset classes), when the Fed splashes down on 16 December 2015.

The Federal Reserve’s cornerstone meeting that may (or may not) usher in the Fed’s first rate hike in nine years is at the forefront of market sentiment. Scheduled for mid-December, the meeting is likely to throw most asset classes into turmoil regardless of the decision actually made.

The reason behind spikes in volatility in and around central bank interest rate decisions simply reflects the hugely speculative nature of modern markets and most worryingly, underlines markets’ reliance on low interest rates and central bank guidance for future direction.

Here are the key economic highlights coming up for the remainder of this week:

Wednesday 2^nd December

EUR CPI Flash Estimate y/y

Huge pressure on the ECB to provide further stimulus measures therefore threatening the Euro. More stimulus is likely to help European stock markets.

Thursday 3^rd December

USD ADP Non-Farm Employment Change

Pre-cursor and early indicator for non-farm payroll report due in the early hours of Saturday morning, AEST.

USD Fed Chair Yellen Speaks

Yellen’s comments are very market sensitive with market watchers anticipating any cues regarding the Fed’s actions on 15 December.

CAD Bank of Canada Interest Rate Decision

Canadian stocks advanced to their highest levels in almost a month on data that Canada’s GDP grew for the first time in three quarters. Interest rates are likely to be left on hold in view of the upcoming Fed

EUR Interest Rate Decision

With interest rates almost at zero, the ECB could provide further stimulus measures or alternative monetary policy in an attempt to generate business activity. The EUR/USD exchange rate is heading for its biggest monthly decline since March as ECB and Fed monetary policy diverge. According to futures date, the markets are full expecting a cut of 10 basis points to the euro area’s deposit rate with a 90% chance of 15 basis-point cut

Friday 4^th December

USD Fed Chair Yellen Testifies

Testifying before the Joint Economic Committee, Yellen is likely to be asked invasive questions on monetary policy. Her answers are likely to spark speculative price moves in all asset classes.

USD ISM Non-Manufacturing PMI

Key macroeconomic indicator likely to influence Fed interest rate policy. A strong number could see markets pause and reverse their rate hike expectations for 16 December. A weak number could do the opposite and signal that the Fed will definitely hike.

USD Non-Farm Employment Change

Non-farm payrolls are expected at 201,000 new jobs in November. Employment is the Fed’s admitted core indicator for setting monetary policy. With the US adding 271,000 jobs in October, traders will want to see a strong 270,000+ number for November in order for Fed rate hike expectations to firm.

With so many potential market drivers on the horizon in the days ahead, all asset classes are likely to feel the wrath of speculative price moves before, during and after each one. The big kahuna remains the Federal Reserve meeting on 15 December.

According to Benedict Goette from Compass Capital based in Zurich, “We’re treading waters for now as the markets are waiting for the central banks’ decisions. A Fed hike is pretty much priced in by now, so equities will probably trade in a tight range.”

Looking back, Seeing ahead

In other news:

• Brazil’s federal and state governments plan to sue BHP Billiton and Vale, the owners of the Samarco iron ore miner, for 20 billion reais ($7 billion) in damages caused by the burst of a tailings dam, Environment Minister Izabella Teixeira told reporters last Friday.

• Consumer electronics industry growth continues to run at elevated levels, says Macquarie Wealth Management, underpinned by telco, appliances and the depreciating AUD.

• Despite the cheer in electronics, one of Australia’s largest electronics retailers, Dick Smith, backed away from its October profit guidance after slashing its inventory by $60 million. The surprise announcement rocked Dick Smith shares which fell 56% at the open on Monday morning. Currently, Dick Smith shares are trading at $0.44, having clawed back around 50% of their value since the announcement.

• Iron ore prices continue to slide, hitting new lows below $43 per tonne despite a weaker AUD.

• The Reserve Bank of Australia (RBA) left interest rates on hold at 2% yesterday with market sentiment largely unaffected given larger themes currently in play.

• The International Monetary Fund’s (IMF) executive board, which represents the fund’s 188 member nations, has accepted the Chinese Yuan as being ‘freely usable’ for the IMF’s Special Drawing Rights (SDR) basket, joining the euro, US dollar, British pound and the Japanese yen.

On a lighter note, in terms of looking ahead, readers may be pleased to know that following Dick Smith’s inventory quagmire, the retailer is now set to initiate a discounting binge to drive sales over the Christmas period.

With ‘70% off’ looking good enough to be true for the time being, and a possible price war about to commence between Dick Smith, Harvey Norman and JB Hi-Fi over the holidays, electronics bargain hunters are likely to have their stockings full this Christmas.