The Perfect End of Year Storm


  • Explosive combination of timing and event risk
  • ECB and NFPs will get plenty of attention
  • Will the less dovish RBA and BoC influence ECB?
  • US Dollar poised to extend already impressive run
  • Don't discount emergence of geopolitical risk

MORE THAN EVENT RISK - Today and tomorrow are a big deal. Clearly, any time you get an ECB rate decision and US employment report, the market is always paying close attention. But it is more than just these event risks themselves. It is also about these event risks in the context of the time of year and the market's desire to really square things up and figure it all out before trade lightens up dramatically in the final days of December. Everyone will be watching to see what the ECB does and if it in fact goes ahead and expands QE and cuts the deposit rate. But remember, this is what the market is expecting and what the market has priced. So be careful. Don't discount the possibility of an initial quick move lower in the Euro, before it rallies sharply into the close of the day on the fact, given all of this had already been priced.

INTERESTING PRECEDENT? Interestingly enough, if we are to dissect previous central bank decisions this week, both the RBA and Bank of Canada produced less dovish than expected decisions. There was every possibility both of these central banks could err more to the side of accommodation, and yet, both preferred to highlight optimism, while downplaying negative risk. So could this be a preview of what to expect from the ECB today? Might we see a less dovish Draghi than anticipated? I wouldn't bet on it. But I also wouldn't rule out this possibility. Just be aware of this fact. But back to my original point in this piece. We are at a critical inflection point, with the Fed on the cusp of a rate hike, while the rest of the central banking world nears the limits of its accommodative measures. And so, heading into the end of the year, we may start to see a bit more of a shakeup.

DOLLAR DIRECTION - The US Dollar is sitting in the driver's set at the moment. If the ECB keeps with its move towards further accommodation, and if tomorrow's employment report comes in at or above expectation, we may see a little Dollar selling on the fact, but ultimately, these fundamentals should encourage additional US Dollar upside into year end. However, any curve balls from these two event risks, could very well derail the Fed's liftoff timeline and stir things up quite a bit, triggering a major sell-off in the Buck. I am of the opinion that the US Dollar will continue to run higher, though at the same time, I think US equities will start to weaken, as this market finally wakes up to the fact that higher rates, no matter how small and how slow of a pace of policy normalization, are not going to be a positive for stocks. Yellen has once again highlighted the drawback of zero interest rates, as it incentivizes reckless investment, and as such, it stands to reason that the removal of such policy will trigger a healthy correction. Bottom line - Fed policy normalization should translate to equity market normalization.

Fed policy normalization should translate to equity market normalization. Via @joelkruger

GEOPOLITICAL RISK - One final point to leave you with. I have talked a little about my fear of geopolitical risk and global terrorism. This is something I think the market isn't really pricing in and a risk that needs to be taken more seriously by our governments right now. I am worried things may continue to escalate on this front, and could have a crippling impact on the recovery in the global economy. It seems the market continues to discount such events, but I am worried this is a big mistake. As we head into these final weeks of the year, I wish all of you the very best. I hope everyone is happy and safe and enjoying all of the family and loved ones around you.


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