The end of the year is just a few hours away and the events of the year have been widely analysed by those following the financial markets. Meanwhile many of the investors and traders have taken their usual holiday, particularly as the end-2015 has provided them with a range of excuses to take some profits.
However, as soon as next week, we could see a more active market and potentially more volatility as the economic calendar is loaded with a flurry of data releases. To start with, on Monday we will get an insight into the momentum of the manufacturing sector across several major economies (China, the US, Germany, Italy, Spain and France) which will serve to assess the state of the global demand and the potential gains/losses after the recent forex dynamics. Indeed, there is a fair amount of controversy around the implications of the weaker Euro for the competitiveness of the European economy in a world which seems to have transitioned to lower demand growth.
Next week investors will have to digest as well the preliminary reading for the December Eurozone inflation. With the European government yields closing the year at low levels and inflation expectations hit by the renewed weakness in commodities and a less brave than expected ECB , significant surprises have the potential to spark volatility in equities and bonds alike. As things stand, a stronger than forecasted inflation should be positive for risk assets and dampen demand for the low-yield assets. However, market reaction or their sustainability might be complicated by the fact that this is only a preliminary estimate which will not include any details on its breakdown.
One day later, on Wednesday, markets’ attention will shift to the US for the change in private employment, factory orders and the Fed’s minutes. The state of the labour market remains pivotal for markets as this remains one of the few areas where consistent improvements have been reported. Having said this, the first rate hike in many years has come with guidance for a gradual and limited lift over. Hence, surprising misses or overshoots are likely to be more difficult to digest than in the past.
Ideally, in my opinion, the data will show a larger than expected change in employment but the surprise should not be so significant as to cause fears of fast increase in rates; in a scenario where data comes well above expectations, the risks for sharp movements in markets are fairly high particularly as derivatives suggest that investors expect the key interest rate to be adjusted more slowly than Fed’s projections show.
On a related note, at the end of the week a new set of labour statistics will become public, including the unemployment rate and the change in average hourly earnings, both of which are heavily weighted by investors.
To sum up, over the first week of 2016 we will have to contend with several statistics which can have the potential to become important market catalysts should the figures differ materially from consensus expectations.
Have a nice day!
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