European open – Anxiety ahead of US jobs data

Does the Fed hold the key to this year’s Santa rally?

We’re expecting a strong bounce back at the open in Europe following what was another brutal day on Thursday, as investors become increasingly jumpy in this period of market uncertainty.

It’s been another rollercoaster week of easing – then potentially heightening – trade tensions (following the agreement at the G20 then arrest of Huawei CFO Meng Wanzhou), inverted yield curves and political humiliation, all of which has fed into the narrative of market instability and uncertainty.

US Yield Curve

Source – Thomson Reuters Eikon

Investors holding their nerve in the hope that the Santa rally will save the day are seriously suffering at the moment, with the FTSE dropping almost 4% this week so far, the Dow more than 3% and the DAX more than 6%. We’ve gone from trepidation over escalating trade wars to full blown fear of a recession it would seem, I wonder whether this is all a bit of an overreaction.

Stocks recovered majority of losses after news that the Fed is shifting to a “wait and see” mode after December meeting

Goldilocks jobs report includes only modest wage growth

There may be a number of risk factors contributing to all of this but I wonder whether it will ultimately be down to the Fed to calm everything down in a couple of weeks. Already market expectations of a rate hike this month have moderated a little – now standing at 78% according to Reuters – and I think people are more and more coming around to the idea that the Fed will be much less hawkish in its assessment than it has been.

Fed Interest Rate Probability Tracker

Source – Thomson Reuters Eikon

Today’s US jobs report could have a big part to play in this. Usually we look at these releases and want to see the best possible numbers – for obvious reasons – but given the fragility in the markets, I wonder whether the goldilocks report for the current environment involves decent – but not great – jobs growth and only moderate wage gains. This would give the Fed and investors encouragement that the economy is ticking along nicely and allow it to take the foot off the gas a little, potentially taking some pressure of the middle part of the yield curve and easing investor concerns.

Dollar Stumbles as Fed Confidence Diminishes

Oil recovery reliant on full Russia involvement in output cut

Oil prices are edging lower again as we await details later on today on the output cut that has been agreed between OPEC and its allies. The terms of the cut appear to hang on Russia, with Energy Minister Alexander Novak reportedly seeking sign-off on the agreement from President Putin before agreeing.

This clearly highlights the difficulty with negotiations this time around, with Libya and Nigeria also requested exemptions and Iran refusing to take part while under sanctions. This also comes after Qatar announced it will leave the cartel after 57 years of membership. The failure of Russia to be fully behind the cut could put further pressure on oil markets unless others – probably Saudi Arabia – agree to pick up the slack.

Cryptos plunge again and remain vulnerable

Bitcoin is on the decline again, with the price falling almost 10% at one stage to its lowest level since September last year. More negative news flow appears to have contributed to the latest drop although, as with the declines over the last month as a whole, I think it simply reflects a general lack of appetite for cryptocurrencies right now.

Bitcoin (Bitstamp) Daily Chart

Source – Thomson Reuters Eikon

The market has looked vulnerable for some time and this strikes me as just another excuse to sell. The next big test comes around $3,000, a break of which could spark another aggressive drop in bitcoin.

Economic Calendar

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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.