Good Morning,

Uncharacteristically for this time of year, when markets usually tend to smoothen up and lighten up in terms of activity, volatility is creeping upwards once again, all for the wrong reasons, as, throughout the end of last week, equities lost ground, eurozone spreads widened and the Japanese yen strengthened further, not to mention to persistent plummeting in the price of oil. Recent market action could very well be a reaction to last week’s somewhat disappointing ECB press conference, at Draghi strongly hinted to further stimulus, failing however to concretely formalise matters. The ECB’s reputation of doing little too late is alive and kicking, and this time round is no exception once again as the ECB continues to delay the announcement of its asset purchase programme. However, the decline in the price of oil (OPEC’s recent decision to let markets dictate the price of oil triggered a widespread sell-off) coupled with eurozone peripheral risk, brought about by the upcoming Greek elections, are taking their toll on the markets.

This week is all about the 17 December FOMC meeting – no great shakes are expected here, merely a strong but clear message to the markets that the Federal Reserve’s plan of rating interest rates in mid-2015 is well on track. Employment numbers continue to surprise to the upside as economic activity and sentiment data continue to indicate a healthy recovering economy, whilst inflationary data, on the other hand, is expected to remain below projections mainly on the back of the recent sharp decline in the price of oil. The FOMC members will be well aware on the implications on the decline in the price of oil and any developments in this front will most likely dictate FOMC policy in Q1 2015.

Towards the end of last week, the ECB announced the take-up of the highly talked about TLTRO which came in at ca. €130bn, €20bn short of what the market was expecting. What is more disappointing here is that the taken up amount is even lower than the outstanding LTRO amount (the first round of LTRO) due to mature towards the beginning of 2015, resulting in an overall net reduction in the bank’s balance sheet – clearly contrary to what ECB’s Draghi and Constancio stated last month (that the ECB intends to increase its balance to €3trn, i.e. to December 2012 levels). This puts further pressure on the ECB to send a strong message to the markets in its January 2015 rate setting meeting.

Meanwhile, members at the Bank of England remain worrisome on the dire situation in neighbouring Europe, as a lack of demand in the eurozone remains the biggest hurdle to the UK’s economic recovery, resulting in a large current account deficit which has subsequently resulted in weaker manufacturing production data. Nevertheless, Services and Manufacturing PMIs this week in the UK are expected to indicate that the certain aspects of the UK economy remain robust, whilst the lower oil price should provide support for the retail sales growth data print once again.

Markets have quite a handful of economic data and events to contend with this week, with the key focus being FOMC meeting tomorrow. On the data front, we have got the CPI print for the US and Canada, the release of unemployment numbers in the UK, Norway, Poland, Russia, Turkey, Mexico, and Brazil. In addition, we await the release of some key PMI data out of the UK, euro zone, France, and Germany, Consumer Confidence for Germany and the UK, as well as Retail Sales for the UK and Canada.

Meanwhile, over the weekend, Japanese Prime Minister Shinzo Abe's coalition registered a huge win in Sunday’s elections. This result poises the newly elect administration to continue bolster reflationary economic policies following large month’s announcement of an unprecedented asset purchase program. Nevertheless, the electorate turnout was bleak hinting towards the broad dissatisfaction with his performance so far.

On a final note, two key events happened overnight and this morning. Firstly, last night, Russia’s central bank raised the key interest rate by a staggering 650 basis points, from 10.50% to 17.0% in an attempt to preserve the ruble, which had fallen to 1998 levels against the US dollar. This is expected to have an adverse effect on domestic liquidity, put a strain on the domestic corporate sector and negatively impact the economy. Meanwhile, this morning the Bank of England announced its most recent stress test results. HSBC emerged as the winner of the tests out of the 8 strongest UK banks tested; Barclays, Santander UK and Standard Chartered fell comfortably in line whilst RBS and Lloyds barely scraped through. The only casualty was Co-Op bank.

Have a nice day!