The calm after the storm: digesting this week's major market moves

It’s become a bit of a tradition for investment banks and trading houses to give their “outrageous” predictions for the year ahead. Around about this time of year you see plenty of predictions that no one really expect to come true. This year I have seen everything from chocolate becoming the new caviar, to Iran flooding the oil markets and UKIP getting into power in the UK. However, events in financial markets over the last few days show that sometimes truth can be stranger than fiction and plenty of outrageous predictions are starting to look fairly tame in comparison.

1, The Ruble would fall nearly 40% vs. the USD in 2 days

Sure, everyone knew that there were problems with Russia but, the declining oil price and sanctions imposed by the West had been around for a while. The market chose to punish the central bank for only hiking 100 basis points last week. The Russian CB was then forced to make a panic hike of 650 basis points in a midnight central bank meeting. In the last two days we have heard that Apple has suspended Russian online sales due to price fluctuations, and the central bank has changed accounting rules for banks so that they can value assets based on RUB exchange rates for last quarter. Putin has blamed the US and the EU for trying to undermine Russia and said that the central bank shouldn’t use its FX reserves to placate the market, suggesting he may not be in favour of supporting the RUB going forward. Russia could face a prolonged recession, especially now that interest rates are at 17%. It also looks like Putin is not going to try and improve diplomatic relations, so if Russia gets into more financial trouble next year, he may find that he doesn’t have many friends if he is in need of a financial hand-out.

2, Greek woes come back to haunt us

On Wednesday the Greek parliament voted on the government’s proposed Presidential candidate. We now move onto the next round of voting scheduled for next week. However, it is looking increasingly unlikely that the government’s candidate will win enough votes, which could spark a collapse in the government and a general election next year. If that happens then current polls predict a win for the radical left-wing, anti-euro Syriza party. If Syriza get into power then we could see the end of the Eurozone, as it is unlikely that Germany et al will stand back if Greece decides to ditch its bailout plan. Widening sovereign spreads, market panic and a sharp EUR collapse could be on the cards.

3, Federal Reserve chairwoman ditches her dovish credentials

When Janet Yellen was promoted to chairwoman of the FOMC the market consensus was that she was an uber-dove, who would keep the US’s rates low for the long term. However, after her latest press conference, Yellen has proven herself to be a pragmatist, and with average job creation for 2014 at 227k, she can’t sit back and do nothing. Although the Fed has said that they will be “patient” when it comes to rate rises, this patience may have a limit. This is a red flag for dollar bulls, and we could see the dollar index rise to 100.00 at some stage next year.

4, SNB fights back against CHF appreciation

In a shock move, the SNB decided to cut rates in to negative territory on Thursday, in an effort to weaken the CHF. EURCHF had come under fresh downward pressure this week as volatility in the markets started to rise as the ruble sold off. The SNB may have wanted to get in with their move ahead of the ECB, the cut in interest rates does not come into effect until 22nd January – the same day as the next ECB meeting. While EURCHF seems to be comfortable above the 1.20 peg for now, we think we could see further action to stem CHF appreciation early next year, especially if the ECB does announce a QE programme at its next meeting.

5, 2015: the year of volatility

While we had expected volatility to pick up in 2015, especially after the sharp drop in H1 2014, events this week suggests that volatility could be a major feature of market performance next year. Firstly, Greek and Eurozone fears could re-surface; secondly, central banks seem to be in a race with each other to get the weakest currency, and lastly, the Fed. We think that part of the reason why volatility was subdued in the first half of this year was because the Fed was too good at its job: it signalled it would taper its asset purchases by a certain amount each month, and it stuck to it. However, now the Fed is back to data watching, which means that the market has to parse every data point and Fed statement in the next few months to determine the exact timing of Fed’s first rate rise. If we are correct in our prediction then we could see some pretty sharp moves in FX markets as we move into 2015.