The Day So Far
Strong bounce in equities this morning led by crude, which enjoyed a $1.5 dollar rebound after briefly breaking below the $35 handle. This move was sparked partly by speculation that OPEC were set to have an emergency meeting to discuss the plunge in Brent crude below $37 and also by the fact that it had hit its lowest level since 2008, including a fall of almost 20% in December alone. While the supply situation remains bleak for the bulls in the short to medium term, a rally from these lows should not be ruled out.
In the currency space, the dollar has shown signs of a recovery against the euro this morning, with EUR/USD retracing from just below the 1.11 handle. This was also the low following the ECB QE announcement back in January, in the middle of the yearly range and a good place for those long the euro from the double-bottom at 1.05 handle to exit as we close in on the FOMC meeting tomorrow. This is despite the German ZEW survey coming in at a three month high for December, while we saw strong selling in fixed income ahead of the Fed and on the back of the considerable rebound in crude this morning. Meanwhile, cable is oscillating within a tight range this morning after UK CPI was in line with expectations for November, rising a meagre 0.10%.
The Afternoon View
A couple of major data points for the FOMC to ponder when they begin their two-day meeting today, with Empire Manufacturing and US CPI scheduled for release at 13:30GMT. While neither of these releases is likely to have any impact on the Fed’s decision tomorrow, it is interesting to note that the Fed is expected to raise rates for the first time since 2006 while CPI is stuck at 0.00% on a month on month basis. This should give Yellen & Co. cover to calm the markets with dovish guidance and to downplay the prospect of an aggressive hiking cycle in 2016. As such, we are turning more constructive on equities in the short term, and short t-notes as crude continues to rebound. Regarding crude, long from pivot was the preferred entry for today but it looks like the trade has gone so we recommend shorting from R2/ $38 handle instead.
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