Global Markets Overview – December 17, 2014

Oil and ruble volatility dominate

Equities rebounded in European trade whilst US equities struggled as investors exercised caution heading into the FOMC meeting. Additionally, oil prices remained extremely volatile, with weakness prevailing. In Europe, traders focused on surprisingly firmer manufacturing and services PMIs, along with a vast improvement in the ZEW economic sentiment readings.

However, focus was mainly on the ruble, whose spike on the back of the interest rate hike proved temporary. Russia will be in a tough spot at the moment after this desperate attempt to resuscitate its currency didn't quite pay off. The ruble dropped around 12% from its highs against the greenback.

USD/RUB actually rallied above 79 before pulling back to around 68. Importantly, if crude oil averages US$60/bbl, Russia's economy will shrink around 4.5% next year. Russia's interest rate was at just 5.5% in February and is now a whopping 17%, which will also see domestic demand suffer.

Capital flight out of the country is likely to accelerate and will cripple the economy further, leading some analysts to feel capital controls could be the next move. Meanwhile, the euro managed to gain ground against the greenback, helped by the data. EUR/USD is actually back at $1.2500, where it will test downtrend resistance.

Fed meeting in focus

Focus now switches to the FOMC meeting which has been pinned as a pivotal one. While the US economy has been progressing significantly, the challenge will be how to proceed given the backdrop of turmoil in the rest of the world.

The US has been immune to events abroad so far but perhaps this will worry the Fed enough to exercise caution. The fact the USD has been quite subdued this week could suggest traders are not overly convinced the fed will take a hawkish shift in language. We have already been seeing some nervous trading in emerging markets heading into this meeting and it's a surprise that investors hadn't planned for this as yet.

I don't think this will play enough of a role to see the Fed hold back, and if they do it'll probably be more of a result of the declining oil price. If the Fed doesn't change its tone, the projections will be key in determining when we might expect lift-off.

Further weakness for the ASX 200

Ahead of the open we are calling the ASX 200 down 0.2% at 5139. I suspect we'll see some cautious trading heading into the FOMC meeting. Should emerging markets continue to struggle, then this will put further pressure on commodities and, in turn, the ASX 200.

Once again, falls for iron ore, gold and oil will remain a concern. Deutsche Bank has cut ratings for MGX, NCM and OZL. There could be some mild profit taking in USD stocks heading into the Fed meeting. There is limited economic data locally today but AUD/USD could continue to drift as the pair tests the $0.8200 mark.

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