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Sentiment in financial markets has staged a dramatic U-turn from the pessimistic sell-off witnessed at the end of last week, with firmness in the greenback and oil helping to underpin confidence in equity markets.   The Asian session saw the Nikkei drop 1.57% in sympathy to Wall Street’s wash-out on Friday, though the magnitude of the losses for the Asian equity index were insulated by the results of the Japanese election which confirmed Prime Minister Abe’s LDP/Komeito coalition were able to hold their super-majority.   The super-majority will allow Abe the ability to charge ahead with the third arrow of Abenomics, and though the record low voter turnout and Abe’s declining public support are concerns for the LDP moving forward, it will be the fractures within the ruling LDP party that will be Abe’s biggest challenge to overcome in the months ahead.

On the economic data front, Japan released its Tankan Survey for the final quarter of 2014, which came in with mixed results as sentiment among the large manufactures deteriorated, though capital spending plans accelerated.   The increase in capital spending plans for large companies within the region is a positive for the economy, despite the wavering confidence over whether Abe’s third arrow of structural reforms will be able to finally hit its mark, as export-intensive industries that are seeing external demand pick-up spur domestic business investment.   The yen has experienced a volatile trading session, though it is edging back into the low-end of its overnight range as USDJPY moves into the high-118s as we head into the North American open, helping to provide support to investor sentiment and thus equity performance.

The news stream out of Europe to begin the week is light, though a rebound in risk-appetite has the major bourses in the green and the  and pound on their back foot as the DXY shows some signs of life, albeit still trading within the consolidative pattern it has been accustom to since the start of December.   Hydrocarbons are once again garnering participants’ attention, with a number of overnight developments driving price action this morning.   The battering of crude continued when trading opened on Sunday after comments from the UAE’s energy minister suggested that OPEC would be unfazed by a further decline in the price of oil, and that there would be no cut in output even if oil prices fell as low as $40/barrel.   In addition, the representative from one of OPEC’s low cost producers said that the group would wait at least three months before considering an emergency meeting, as the next meeting is not due until June 5th.

The initial smack-down when futures trading opened propelled front-month WTI into the mid $56s, though Texas Tea has since recovered and managed to find supporting bids on headlines that Libya had declared force majeure at two of its oil ports and will halt output at some oil fields due to armed clashes in the area.  Though the closed oil ports only represent roughly 560k barrels per day, both WTI and Brent have managed to recover from their earlier losses, with Brent changing hands north of $62/barrel.

As we get set for the opening bell in North America, the economic calendar is sparse, though we did get a reading on manufacturing activity for the New York region over the month of December.   The Empire State manufacturing index saw a sharp decline from November’s levels, dropping from +10.16 to -3.58, missing expectations of a bump in activity to +12.40.   While only one region of the US economy, this isn’t something the Fed hopes is a trend through other manufacturing hubs during the last month of 2014, but is unlikely to alter the Fed’s course of action at their two-day FOMC meeting this week.   The loonie is on slightly weaker ground against the USD before the opening bell, but is close to unchanged and pivoting in the high-1.15s as broad-based USD strength drives price action for the pair.   PMI reports from around the globe are due to hit the wires over the course of tomorrow’ssession, with the results of purchasing manager activity in China and Europe garnering particular attention given the slowdowns that have been recently witnessed in the respective economies.   Expect the release to drive market sentiment ahead of the Fed meeting on Wednesday, likely to create some volatile conditions as traders’ position for how the Fed will convey their economic assessment of the US economy as 2014 comes to a close.

Further reading:

CAD: Loonie Taking Notes From Nokkie; What’s Next? – CIBC

EUR/USD: Trading The German ZEW Economic Sentiment