All Priced In, But By How Much?

A big final week of 2015 for central bank policy and macro data this week – the only remaining event after this week is the December FOMC.

What’s factored in?

A no-move is fully priced in with the market being told to “chill out” ahead of tomorrow’s Reserve Bank of Australia (RBA) meeting. The interbank market is sitting at a 5% chance of a move (which is just hedging teams providing the smallest amount of cover required) and the AUD has now found a concrete floor at 71 cents.

What’s also likely is the limited outlook from the statement, considering the ‘chill out’ answer was tied to the rest of this week’s events and the fact that the RBA wants to have the ‘full’ economic picture to assess policy for 2016; tomorrow will be the most lacklustre event of the week – no surprises will be sprung.

China’s Caixin manufacturing and non-manufacturing PMI data due tomorrow, however that is not what we are watching. What is starting to build is CNY devaluation (again). Friday’s intraday collapse on the Chinese markets has been put down to the investigations into ‘margin financing and short selling’ at the three largest brokerage firms in China. However the fact that price action went global (Chinese ADR’s were punished on the weekend) suggests something bigger – this could be the next leg of the July - August move.

ECB is meeting on Thursday is the most ‘overpriced’ event globally. There is growing belief that the board will be harder and stronger than the predicted cuts from economists on Thursday morning AEDT (late Wednesday night in Hong Kong and Singapore).

Economists are pricing in a ten basis point (bps) cut to the deposit rate taking it to -30bps, that the board will increase the bond buying program by €15 billion to €75 billion and will push the timeline well out (currently September 2016).

However, 2-Year German Bunds are currently sitting at -41bps and the movement in EUR/USD since the October meeting has seen eight cents coming out of the pair – suggesting it’s also pricing in a ”shock and awe” move this week from Frankfurt.

ECB

OPEC meet to discuss production ‘quotas’ in Vienna on Friday as it looks to ‘normalise oil prices’. I see this as a very interesting event, oil started to shift last week on the idea the Saudis are going to come to an accord to cut production and drive the price back towards US$60 a barrel. Price action was shifting in this direction mid-week, however the EIA data from the US blew that out of the water seeing as an additional one million barrels of oil are in stock. Moreover, in the past two years the Vienna meeting has yielded no change to current output – I expect the same in 2015 and as does the market.

Ten members of the Fed speak this week. Three of these will come from Janet Yellen herself, however only one is in a setting where she will address monetary policy when she testifies to Congress.

The US dollar remains above 100 and the front end of the US bond curve continues to be short sold. It is also the last ‘Fed speak’ event the market will hear before the ‘black-out’ period ahead of the December 16-17 meeting. The Fed funds December futures is factoring in a 77.5% probability – a new high. Interestingly, the next rate hike is not expected until June 2016 and that is only at a 39% chance.

Ahead of the Australian Open

Ahead of the open, we are calling the ASX 200 dead flat at 5201. With no trading in the US since last Wednesday, equity leads are thin. Oil slumped back to the price it opened at the start of the week, and copper and other industrial metals finished the week flat. Leads remain thin and the crash in Chinese equities are also a concern for the open in Asia.