The strong bounce in the equity market which we experienced during the European and US trading session is fading away this morning, as we are heading closer to the FOMC meeting. The gains which we experienced yesterday, were also the result of bargain hunting, and as a result, the European markets posted their best one day gain since October.
Investors were optimistic that Fed may not be initiating their tapering program during this month. But, what we think is, that the base case scenario is, that the Fed could be initiating a small tapering of $5- 10 billion, and could leave the room open for further tapering on data dependent. This is what we are seeing in the US bond market and for the greenback. At the same time, it is also important to state that the markets which have somewhat factored in small tapering, if no tapering at all, they definitely have not factored in when this tapering will end. Keep in mind, that the initial tapering idea was introduced early this year with the target of winding this operation all together by the mid 2014, but given that we are in the final month of December, and there is still no clear announcement of tapering, the process of winding down of this operation could easily drag into year 2015
Anyhow, for now, today’s focus will be surrounded around the US CPI number which is due at 13:30 and the expectations are for 1.3%, a rise from the previous reading of 1%
Back in Europe, the economic calendar is full with new menu with German Zew economic sentiment due at 10:00 GMT and the forecast is for an improvement for the biggest economy of the eurozone. The expected number is 55 while the previous reading was for 54.6%. As for the FTSE 100, the index is trading close enough to its yesterday close, and the CPI data for the Sterling economy is also due around 09:30 GMT. The concern for many is that the increasing energy prices could very well have an impact on the final reading of Core CPI.