It’s been a struggle for equities to hold onto any meaningful ground so far in 2015, as crumbling commodity prices puts downward pressure on consumer prices and the disinflationary forces around the globe have investors adjusting their portfolios to increase exposure to fixed income. Adding to the risk-off feel that has been permeating through the global marketplace, the World Bank cut their 2015 global growth forecast, slashing their estimate from 3.4% to 3.0%. As a result of softening economic activity on a global scale, the World Bank expects the Fed to hold off raising rates longer than anticipated, especially when considering the affect falling prices and stagnant wage growth will have on the domestic performance of the United States. The prospect of the Fed delaying the implementation of their rate tightening cycle was echoed yesterday by regional Fed President Kockerlakota, and though he has rotated out of a voting seat in 2015, reiterated he doesn’t favour raising rates in 2015. The overnight Asian session was unable to buck the pessimistic sentiment that engulfed Wall Street’s close, with the Nikkei shedding 1.71% by the closing bell, and USDJPY sliding on yen strength to pivot around the 117 handle.
The big news out of Europe was the ruling on the European Central Bank’s Outright Monetary Transactions by the European Court of Justice. Recall that last year the German Constitutional Court found the ECB’s OMT incompatible with European law, and presented the issue to the European Court of Justice to rule on. Close to a year later, the ECJ levied its opinion on the program, and found that subject to certain conditions being met, the OMT program was in line with EU law, as long as there is no direct involvement in financial assistance program that applies to state in question. Though the opinion from the ECJ is non-binding at this point, with the final decision being expected by the middle of this year, the advice from the preliminary ruling is usually followed. In addition to the advice of the ECJ, Europe’s top court defended the discretion of the ECB to implement and frame monetary policy, arguing the expertise and experience needs to be respected. While the decision from the ECJ is in respect to the ECB’s OMT program, the preliminary ruling and support of the ECB’s decision making framework paves the way for the implementation of an impending sovereign bond purchase program. The euro slipped on the news of the ECJ decision, dropping into the low 1.17s against the greenback, though EURUSD has since found some buying support that has brought the pair back to unchanged in the high-1.17s.
As we get set for the opening bell in North America, the loonie is struggling to gain any traction as low oil prices continue to darken the outlook for the commodity-linked currency. Yesterday, Bank of Canada Deputy Governor Timothy Lane warned that low oil prices are likely to be bad for Canada as a whole, and that it could delay the country’s return to production potential. While Lane stopped short of saying the decline in oil prices would delay rate hike considerations as the BoC would look through the temporary drop in inflation caused by lower oil prices, the gloomy short-term outlook has failed to lend any strength to the already struggling domestic currency.
On the economic data front, the US saw a sharp decline in consumer demand over the month of December, with retail sales dropping by 0.9%, a faster decline than the drop of 0.1% that had been expected, along with November’s increase being revised to only a 0.4% pace. In addition, the decline in export and import prices over the month of December reiterated the challenging price landscape given the drop in energy prices, with both measures showing a drop in prices of 1.2% and 2.5% respectively. The DXY is sagging on the news which has led to the loonie perking up and pushing USDCAD back into the mid-1.19s, rebuffing another failed attempt at overtaking the 1.20 handle. Equity futures are escalating the downward momentum seen overnight, with the S&P looking to continue its struggles and potential test the 2,000 mark to the downside.