Crucial OPEC meeting to drive volatility this week

Macro Outlook

Although the curtain has fallen on the Federal Reserve’s easing measures, anyone who doubted the commitment of the central banks to drive ever looser monetary policy had a sharp reminder on Friday that the Fed is not the only player in town. There are plenty of other central banks ready to take up the dovish mantle. A few weeks ago we had the Bank of Japan expanding its asset purchase programme and on Friday we had indications from not one but two of the other major central banks. Mario Draghi loves to jawbone the euro lower and once more he has succeeded. Although once more he has effectively done little more than talk a good game, the market continues to act like an obedient lap dog, sending Eurozone equities sharply higher and the euro sharply lower. Imagine what they would do if he actually were to say the words, “The ECB will now begin to purchase Eurozone sovereign debt” (sell on rumour, buy on fact, anyone?). If you add to Draghi’s comments, a surprise rate cut at the People’s Bank of China, then you have got three of the biggest central banks in the world all continuing to explicitly engage easier monetary policy. However with the Fed not one of them, markets are set up nicely for not only continued gains in equity markets but also an extended a dollar bull run.

Must watch for: Organisation of the Petroleum Exporting Countries (OPEC) meeting

Impact: Saudi Arabia has recently been adamant that there is no need to cut production and now is the moment we will find out if they are happy to continue pricing other countries out of the market, be it politically motivated (against Iran and Russia) or economically (against US fracking producers). However, there will be significant pressure from OPEC members for Saudi to cut production. Expect high volatility in the oil price this week. This could also have a knock-on impact on equity markets with a falling oil price akin to a pseudo tax cut.

Foreign Exchange

Anyone that was watching the recent rally on the euro and who questioned the wisdom of the crowded short euro trade, should remember you can rely on Mario Draghi to once more jawbone the euro lower. Friday’s speech in Frankfurt did not tell the market anything especially new but effectively reaffirmed the ECB president’s commitment to do “whatever it takes”. In pledging to tackle the falling long term inflation expectations, the ECB president is driving expectations of a move towards full blown QE. The speech triggered a sharp move lower on the euro (and subsequently higher on the dollar) and had a significant impact on the Dollar Index. Due to the construction of the Dollar Index (58% of .DXY is based on the movement of the euro), the basket of currencies is again on the brink of a breakout. A bullish break would have been secured for sure had the PBOC not made a surprise rate cut which sent the commodity currencies (Aussie, Kiwi and Canadian loonie) all sharply higher. However, after two weeks littered with choppy trading and false signals for the dollar, finally the bulls look set to gain control once more.

WATCH FOR: The raft of US economic data on Tuesday and Wednesday could mean that volatility is front loaded this week before things calm down for Thanksgiving. The Eurozone flash CPI will be the big focus for euro traders after the German Ifo, with sterling traders watching UK GDP, and yen traders on Japan CPI.

Indices

Friday gave further proof that investors continue to lap up the actions of dovish central bank, as equity markets, especially those in the Eurozone, got a double shot in the arm from the ECB and the People’s Bank of China. Mario Draghi delivered a supportive speech, stressing the need of the ECB to act quickly on tackling falling inflation expectations, in effect underlining his desire to push the ECB towards full blown QE. The reaction of the DAX and CAC suggests that if he is actually one day allowed to announce formal purchases of Eurozone sovereign debt, Eurozone equity markets are the place to be invested. The move was also exacerbated by a the first PBOC rate cut since July 2012. Dovish moves by the PBOC traditionally drive risk sentiment through the roof and risk assets reacted accordingly, with mining stocks soaring to the top of the performance board. The DAX is now just over 3% away from its all time highs again, with the French CAC 40 around 5% off its multi-year highs. Interestingly though the FTSE 100 is only just over 2% away from its own multi-year highs, proving that despite underperforming in the last few weeks, it fell less in the first place. The S&P 500 meanwhile continues to merrily post further new closing all time highs, with a 45th of 2013 on Friday, the same as the whole of 2013.

WATCH FOR: German Ifo Business Climate could set the tone for Monday, but then focus turns to a raft of US data which could continue to drive positive sentiment on Wall Street. The fun this week could be front loaded, as Thanksgiving leaves the US on an extended holiday.

Other Assets: Commodities & Bonds

The coming week could be incredibly important for commodities, with two crucial fundamental events which could potentially drive volatility significantly higher. Even after the impact of Friday’s surprise rate cut by the People’s Bank of China and the impact on the prices of metals and natural resources, the decisions over oil production levels at the OPEC meeting this Thursday could either send the price of oil spiking higher (if there is a decision to cut production) or back lower to test the floor again (if production is held steady). Then on Sunday, there is the Swiss Gold Initiative referendum which if it returns a “Yes” vote could send the gold price strongly higher, whilst a “No” vote could lead to another decline. It seems as though with both events, the likely winner will be volatility. Options traders could have a field day.

The dovish Bank of England Quarterly Inflation Report has driven a wedge between the yields of Treasuries and Gilts. After spending the past 14 months broadly tracking each other, Gilt yields have dropped sharply as Treasuries have stabilised. The spread is now dropping to test the August 2013 multi-year lows at -0.306.

WATCH FOR: US economic events could drive early week moves for commodities but the OPEC meeting and the approach to the Swiss gold referendum will be key. US events will continue to drive Treasuries.