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    IronFX Daily Commentary | Markets in a risk-off sentiment in the first trading session of the year | 04/01/2016

    04.01.2016, 11am 

    • Markets in a risk-off sentiment in the first trading session of the year Investors’ risk appetite fell at the start of the year after Saudi Arabia’s execution of a Shiite cleric spurred sectarian protests and violence in the Middle East. This seems to have sparked a serious diplomatic rift as Saudi Arabia severed ties with Iran on Sunday and gave 48 hours to Iranian diplomats to leave the country. The tensions in the Middle East boost demand for the safe-haven JPY, CHF and Gold in the first trading session of 2016 and the risk-off environment hit shares across Asia, with NIKKEI 225 down more than 3%. The negative sentiment rolled into the European markets and DAX gapped down at its open. In addition, the turmoil in the Middle East could also support oil on supply worries and oil related currencies like CAD and NOK.

    • Overnight, Chinese data showed that manufacturing activity stayed below 50 for the 10th straight month in December, spurring renewed fears over China’s economic slowdown. This added to the turmoil in the Middle East, sending the financial markets around the region well into the red.

    • Today’s highlights: Monday is a PMI day. During the European day, we get the December manufacturing PMIs from Sweden and Norway, though no forecast is available for either as of yet.

    • We also get the final manufacturing PMIs for December from several European countries and the Eurozone as a whole. As usual the final forecasts are the same as the initial estimates, thus the market reaction on these news is usually limited, unless we have a huge revision from the preliminary figures. The UK manufacturing PMI for the same month is also coming out and is expected to have remained unchanged from November. As the slowdown in Q3 GDP was partly attributed to the manufacturing sector, which has recovered somewhat since then, any indications of a new downturn may weigh on the pound.

    • The German flash CPI for December is forecast to have accelerated to +0.4% yoy, from +0.3% yoy in November. As usual, we will look at the larger regions for a guidance on where the headline figure may come in and thereby as an indication for the near-term direction of EUR. A rise in the inflation rate of Eurozone’s growth engine could indicate a rise in the bloc’s CPI rate due to be released on Tuesday and may support EUR, at least temporarily.

    • The Canadian RBC manufacturing PMI for December is also coming out, but no forecast is currently available.

    • In the US, the ISM manufacturing PMI and the final Markit manufacturing PMI, both for December are due out. The market pays more attention to the ISM index which is expected to have increased, but to still remain below the crucial 50 level. A possible rebound above 50 would indicate expansion and could prove positive for the greenback.

    • As for the speakers, during the Asian session, US Cleveland President Loretta Mester speaks.

    • As for the rest of the week, on Tuesday, Eurozone’s preliminary CPI for December is forecast to have accelerated to +0.3% yoy, from +0.2% yoy in November. A possible rise in the German inflation rate the day before could increase the possibilities for an improvement in the bloc’s rate as well. Given that at its last meeting, the ECB eased policy further to encourage higher inflation, an acceleration in the bloc’s CPI rate could indicate that the measures are exerting the desired effects and as such, this could support EUR a bit.

    • On Wednesday, from the US, we get the ADP employment report for December, two days ahead of the NFP release. The ADP report is expected to show that the private sector gained 190k jobs, fewer than it did in the previous month where the print hit 217k, but pretty close to the 200k mark. Although an unreliable predictor of the NFP number, this could increase speculation that the NFP print on Friday may also come near 200k. Indeed, expectations for the NFP figure are currently at 200k. Also, the Fed will release the minutes from its December 15-16 FOMC meeting, where the committee raised interest rates by 25bps, in what many considered a historic move. Well before the meeting, Fed officials have been repeatedly stating that the focus should be on the pace of future rate hikes rather than the initial hike itself, something that was also confirmed by Chair Yellen at the press conference following the decision. As a result, the minutes of the meeting will be closely monitored for any hints on what other factors, besides domestic data, might affect the pace of the tightening cycle. The ISM non-manufacturing PMI and the final Markit service-sector PMI, both for December, as well as the factory orders for November are also coming out.

    • On Thursday, we have no major events or indicators due to be released.

    • On Friday, the main event will be the US employment report for December. The current market forecast is for an increase in payrolls of 200k, down from the 211k in November. Moreover, the unemployment rate is forecast to have remain unchanged at 5.0%, consistent with the Fed’s target of full employment, while average hourly earnings are expected to grow at the same pace as in November. After the first rate hike, Fed officials stressed that the path of future policy will be data driven, and that the labour market has shown considerable improvement, which they expect to continue. Therefore, another solid employment report could keep the FOMC members content with their current pace of tightening indicated by the ‘dot plot’. This could encourage USD-bulls to add to their positions.

    • From Canada, the unemployment rate for December is expected to have remained unchanged at 7.1%, following an unexpected increase in November. This was mainly because temporary government hiring for the October federal elections was reversed. In their December monetary policy statement, the Bank of Canada described the labour market as resilient. However, with falling oil prices, we could see declining revenues and investment in the country’s energy sector to start weighing on employment, at least in oil-intensive regions.


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