German GfX consumer confidence should continue to trend higher

Market movers today

• In terms of data releases we have a quiet day ahead of us. German GfK consumer confidence should continue to trend higher supported by the lower oil price and improvements in the labour market despite weaker manufacturing data during 2014.

• Around noon the ECB will announce the last 3y LTRO repayment in 2014 and there is a risk a large amount of liquidity will be repaid before year-end. However, last week’s take-up on the TLTRO and the repayment of the 3Y LTRO has had a net injection on excess liquidity of EUR90bn and excess liquidity should remain high over year-end as we only expect banks to repay EUR15bn on the LTRO.

• Fed’s Lacker (non-voter, hawk) and Evans (non-voter, dove) are scheduled to speak. While Evans makes opening remarks, Lacker will speak on the economic outlook and he is more likely to elaborate on his view on the decision at the FOMC meeting.

Selected market news

This morning, Bank of Japan - as expected - left monetary policy unchanged at the bank’s December meeting. The bank thus maintains the JPY80trn target for the annual, rise in the monetary base and will continue its ‘second-to-none’ purchases of assets such as government bonds, equities and real estate investment trust in order to boost its balance sheet. After its relatively aggressive and pre-emptive easing move on 31 October, we believe the bank is unlikely to ease again soon.

Although Yellen at Wednesday’s FOMC meeting talked down the direct influence of the Russian turmoil on the US economy, the situation in Russia remains very much in focus. At yesterday’s traditional yearly press conference president Putin blamed the west for the economic troubles and repeatedly claimed that the rouble’s significant drop in recent months is a consequence of ‘external factors’. Putin’s tone on the economy was, however, at the same time surprisingly dovish and liberal. He opposed capital controls, did not view the recent interest rate hike as the right choice, but stated that macroeconomic stability had demanded the decision. Putin backed the decision to let the rouble float and opposed spending FX reserve on rouble support. He said that the difficult times could last up to two years, and oil reserves are a good protection. Putin also hoped that banks will not raise interest rates on home loans after the interest rate decision, but did say that the situation indeed is difficult.

While the FOMC’s statement and Yellen’s comment on Wednesday in many ways had a hawkish twist, the committee’s pledge to remain ‘patient’ before hiking the federal funds rate from the historical low has together with Putin’s liberal tone supported general risk sentiment, sparking a relief rally. Global equities moved higher and US stocks continued the rebound in last night’s US session with S&P500 up 2.4% for the day – the biggest two-day rally in almost two years. With the outlook for higher rates, US treasuries sold off and the 10Y US rate is now up roughly 12bp since the FOMC meeting. Meanwhile Brent crude continues its volatile fluctuations around USD60/bbl. We will continue to look for evidence that USD60/bbl marks a point of price support, thereby giving the first indication of the oil sell-off losing steam.