December 1 – We turn the page on the calendar to December, which as I pointed out yesterday, could prove pivotal in its own right. The question before us, can we turn the page on the markets? The International Monetary Fund granted China its wish Monday, giving the yuan reserve status. The yuan won’t officially join the IMF’s basket of currencies until September, but the markets have already responded. China’s stocks reversed big losses to post impressive gains following the news, with other global stocks up as well. Stocks in China also responded to surprisingly positive factory output data. Global equities traditionally do well in December, so the sun is a bit brighter for many in the financial world this morning.
Next up on the global watch list is Thursday’s European Central Bank meeting. As indicated Monday, expansion of the ECB’s asset purchasing program is not a done deal, but it is highly likely. That keeps uncertainty on the table heading into Thursday’s meeting. There has been a smattering of positive economic news out of Europe in recent weeks, but its problems remain significant.
Meanwhile, the European Central Bank has fully bought into its belief that the future of the region’s economy rests on its shoulders and it’s not about to let up now. In fact, I believe that it will do what it can to increase momentum, expanding its asset purchasing program in weaker debtor nations, and perhaps corporate bonds as well. This should keep downward pressure on the euro longer-term as the policy in effect continues to pump currency into the system, although a profit-taking bounce can’t be ruled out. On the other hand, anything less in the way of action could lead to significant disappointment by currency traders and a more robust recovery for the euro.
A potentially significant meeting of OPEC takes place on Friday. Oil prices bounced last month when Saudi Arabia gave lip service to stabilizing prices for member nations. That raised hopes that Saudi Arabia would participate in a production slowdown to reduce surplus supplies, marking the end of one year strategy of flooding the global market with crude oil. That strategy seriously weakened many of its regional foes, while also punishing the U.S. fracking industry.
I seriously question whether Saudi Arabia is willing or interested in letting up the pressure on its Middle Eastern foes. Its strategy of driving oil prices down certainly hurt itself, but it inflicted far greater damage on regional foes that it sees as a security threat. It’s not about to let up now, just as tensions intensify in the region, in my opinion. It may give lip service to reducing production, and perhaps even sign an agreement, but I expect the pipeline to remain full. Nonetheless, Friday’s meeting will no doubt be critical for providing direction for the crude oil market going forward, with implications for the broader commodity sector.
Friday’s U.S. monthly jobs report closes out a big week for the markets. Monday’s economic data was troubling, with Chicago Fed region manufacturing data raising a number of red flags. Manufacturing contracted, with new orders shrinking and few indications of desires to build inventories, reflecting bearish sentiment in the industry. The Fed really wants to get interest rates off zero, but the data increasingly suggests that it missed its best opportunity. We find out on December 16 whether it pushes ahead to get it done anyway before things get worse. Commodities tried to rally to start the month, but strength is withering again. The grains may have the best shot at a bounce this month, but they’ll likely face continued head winds in trying to do so. That said, it becomes easier for a surprise in one of the many events on the economic calendar to turn the tide with commodities at multi-year lows. As such, I continue to respect the possibility of a bottom, while bracing for the anticipated slow erosion lower near-term.
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