While the last trading day of 2014 will be important if only to see if Dow 18,000 can be recaptured on what is sure to be the lowest volume in years, don’t expect much help from Brent which continues to slide and was down nearly 3% at $56.20 or WTI which is also flirting with the $53 level, down almost 2% overnight both set to cap the worst year for the commodity since 2008. Not much should be expected from Treasuries either, set to return over 6% in 2014 – the best performance since 2011 – crushing the latest hoard of bond shorts all of which got the Treasury move in 2014 epically wrong, which will close early at 2 pm. Which means that the HFT algos will once again be driven off the illiquid USDJPY correlation, where low volume will mean 5-10 pip moves today should be the norm, as well as European stocks, whose Stoxx Europe 600 Index rose 0.3% earlier on the latest round of jawboning by an ECB member, this time Dutchman Peter Praet, who said in an interview with German newspaper Boersen-Zeitung that lower oil prices increasingly risk de-anchoring inflation expectations, indicating that quantitative easing is becoming more likely.
In other words, the great crude crash, while completely ignored by the Fed may just be the scapegoat that launches European QE despite Germany once again opposing QE, when Merkel’s chief economic advisor Christoph Schmidt said he sees no need for ECB to buy sovereign bonds at this moment.
For now, however, the algos have latched on to the hope of ECB coming once again to the rescue even if the sudden political seachange in Greece has made outright QE increasingly more improbable, and with Draghi once again bringing up not only the bitter topic of a “complete monetary union” but also a “capital markets union“, it appears that Europe is once again stuck in that place where it found itself in 2011 and 2012 where in order for the ECB to continue printing money, peripheral nations need to prepare to hand over more sovereignty to the northern states. Considering the latest bout of nationalism and pro-independence moves across Europe, this could hardly have come at a worse time.
Keep an eye on the 11:30 am Eastern ramp today to see if math PhDs again forgot to adjust their intraday ramp clocks because unlike the regular US day session, trading on the London Stock Exchange will end at 12:30 p.m. local time, and NYSE Euronext’s European cash markets will close 35 minutes later. The Madrid bourse will stop trading at 2 p.m. local time. Exchanges in Germany, Switzerland, Italy and the Nordic countries are closed. This doesn’t mean, however that the pre-programmed US market algo ramp which takes place both before the normal European and US closes, won’t take place just as scheduled.
Mainland Chinese stocks topped off the year in style, surging 2.2% to 3234.68, soaring 53% despite the final December Manufacturing PMI – printing at 49.6, the first contraction since April – showing China’s economy is slowing down to a pace not seen in recent history. Or rather, soaring due to the the economic slow down, which like in the West is taken as a sign of more central bank easing on deck. Meanwhile, as the WSJ notes, in Hong Kong, the Hang Seng Index rose 0.4%, to 23605.04, gaining only 1.3% for the year, significantly underperforming its mainland counterpart. Chinese firms listed offshore have been more susceptible to concerns about slowing economic growth, and the Hang Seng Index is driven less by retail investors than by institutional investors. Buying by local Chinese retail investors has provided a major boost to volumes and gains in Shanghai this year. For a good explanation of the unprecedented stock bubble mania that has gripped China read Seeking to Ride on China’s Stock Market Highs.
Finally, before we move on, it is worth noting that Saudi Arabia’s stock market, tumbled earlier today after news that Saudi’s aged and frail King Abdullah was admitted to hospital for medical checks. We will have more to say about this shortly.
In summary:
- Treasuries gain on the last trading day of 2014, led by 7Y and 10Y ; volumes expected to be light as futures trading closes at 1pm ET, cash at 2pm ET.
- A China factory gauge sank to a seven-month low in December, with HSBC/Markit’s PMI falling to 49.6 from 50 in Nov. and preliminary reading of 49.5
- ECB’s Peter Praet warned in an interview with German newspaper Boersen-Zeitung that lower oil prices increasingly risk de-anchoring inflation expectations, indicating that QE is becoming more likely
- Christoph Schmidt, head of Merkel’s council of independent economic advisers, says in Die Welt interview that he sees no need for ECB to buy sovereigns after bank already committed to other asset purchases and cheap refinancing operations
- Merkel stepped up her criticism of anti-Islamist demonstrations across Germany, saying refugees have the same aspirations as the citizens of her former communist East German homeland
- Greek polling data suggest neither Prime Minister Samaras’s New Democracy nor the main opposition Syriza party will win an outright majority in next month’s election, meaning coalition negotiations or even a repeat vote will be needed
- The number of Americans dying from influenza and pneumonia has hit epidemic levels this winter as the nation faces the second-highest influenza rates since swine flu swept the country in 2009
- Treasuries are on track to return about 6% in 2014, best performance, since 2011, led by double-digit gains for 10Y and 30Y sectors, according to BofAML indexes; 10Y yields began the year at 2.989%, 30Y at 3.922%
- Curve flattening drove UST performance this year: while Fed policy evolution pushed 2Y and 3Y yields to highest levels since 2011, long yields declined as weak European economy and plunging oil price during 2H reduced inflation expectations globally, pushing core eurozone 10Y yields to record lows
- Sovereign yields mostly higher. Asian and European stocks mixed, U.S. equity-index futures gain. Brent crude, gold and copper fall
Economic Data
- 8:30am: Initial Jobless Claims, Dec. 27, est. 290k (prior 280k)
- Continuing Claims, Dec. 20, est. 2.368k (prior 2.403k)
- 9:45am: Chicago Purchasing Manager, Dec., est. 60 (prior 60.8)
- 9:45am: Bloomberg Consumer Comfort, Dec. 28
- 10:00am: Pending Home Sales m/m, Nov., est. 0.5% (prior -1.1%)
- Pending Home Sales y/y, Nov., est. 3.6% (prior 2.2%)
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