Russia Hits Panic Button | China Still Struggling

The holiday season has started with the festival of lights (Hanukkah) this week and Christmas coming up next, but the world keeps hitting the higher yields hard. Here are 3 of the latest geopolitical gossip that have created risk aversion among traders.

Russia hits panic button with 6.5% interest rate hike

Russia’s rate rise had the opposite of the desired effect yesterday, forcing the Rouble lower by as much as 25% at one point, before regaining a modicum of composure later in the session. At it’s peak the rouble was trading at 80 per US Dollar and broke through 100 versus a single Euro. In Russia banks saw queues for people wanting to withdraw Dollars and Euros and shops saw people fighting to get their hands on goods before prices rose.

With the Russian economy heavily-dependent on oil and energy, it’s no wonder that the Rouble followed in the footsteps of oil when the commodity crashed to record lows this week.

A quick look at the crude oil charts suggests that major economies could expect more downward price pressures in the coming months, as oil reached record lows at less than $60 per barrel this week.

Some of the reasons why oil continues dropping include Saudi Arabia’s oil price adjustments and higher oil inventories in the US. In fact, the shale boom in North Dakota and Texas has allowed the U.S. to go head-to-head with Saudi Arabia in being the number one oil producer in the world.

So With oil not being on Russia’s side, talks of deflation could pop up once more, potentially sparking another round of currency wars among central banks. It doesn’t help that several major economies, such as the euro zone and Japan, are facing bleak growth prospects that could further weigh on price levels.

The knock on effects in other markets were significant, with all European markets moving between significant losses to significant gains over the course of the session. The FTSE closed up by 2.4% on the day, eventually, having only made a return to form, along with all other European equity markets, towards the middle of the afternoon.

Will a QE work in Euro?

In Europe, the expansion of German manufacturing has fallen to a near two year low. Preliminary December PMI readings showed German output was below forecast and could well fall below the breakeven level of 50 in the near future unless something significant changes. German government bonds saw their yield drop to record lows on the news as investors pile in to the AAA rated bonds over fears for their capital.

Overnight we heard from ECB member Coeure who said that though the Central bank was looking at ways of facilitating quantitative easing, it was a little naive of the market to be so fascinated with the prospect, given that there are no guarantees that policies that worked in the US and Japan will work in Europe. We believe the fascination stems from continuing falling prices and output in even the most robust member states, such as Germany and the seeming reluctance for anyone in power, other than Mario Draghi, to acknowledge the elephant in the room.

China is Still Struggling

We’ve had some week economic data from China recently (right when I was in Shanghai actually. I swear it wasn’t my fault!)

Industrial production was much weaker than expected with a 7.2% year-over-year gain in November, lower than the projected 7.6% reading and the previous month’s 7.7% increase. Fixed asset investment, which is considered an early signal of economic activity, slipped from 15.9% year-to-date in October to 15.8% in November

Stocks out perform their regional counterparts on speculation that the People’s Bank of china could be lining up some additional stimulus measures. However investors in China seem to have been showing signs of manic trading that don’t normally appear until a market has been in a bull run for years – China’s has been going for just three months. Apparently on a few days this month trading volumes traded on the Shanghai index have been larger than all other global equity markets combined.

The warning is that the stimulus the PBoC have put in place to date is fuelling markets, but not stopping an economic slowdown, which in turn widens the gap between stock market performance and economic reality.

Coming Up…

This evening is the FOMC rate announcement, where investors will be listening for whether Janet Yellen keeps the ‘considerable time’ phrase when talking about rates being low, or if this is removed in favor of something a little more quantifiable. Stock traders are hoping for a dovish statement so that they can go ahead and start their Santa Claus rally.

Intraday Forex Technical Levels

GBP/USD 4-hour: Teasing 23% Fibonacci level.

Invest Diva positioning: Long positions above 1.5709 with targets at 1.5800 and 1.5873 in extension.

Technical reasons why: The pair failed to reach the 38% Fibonacci level and back to our pivot level at 1.5709 as forming the spinning top above the Ichimoku’s cloud. The RSI is above the neutrality area.

Alternative Scenario: Below 1.5709 look for further downside toward 1.5631 and 1.5562.