Trade Optimism And The Recovery In Oil Boosts Risk Appetites

Italy rounded out the miserable EMU industrial output performance in November. Recall last week investors learned German industrial production crashed by 1.9% (for a -4.7% year-over-year pace) and earlier this week, France reported a 1.3% drop (-2.1% year-over-year). Today investors learned that Italian industrial output slumped 1.6% (-2.6% year-over-year). We suspect that besides toying with its forward guidance, the ECB will move toward a new round of Targeted Long-Term Refinance Operations (TLTRO) in Q2. 

After breaking above $1.15 in the middle of the week, it has found good demand below there on pullbacks. It is interesting to note that Turkey has swapped the $2 bln it raised in a bond auction into euros, but it hardly accounts for the persistence of the euro's upticks. It is up for the fifth time in the past seven sessions. There is a 2.5 bln euro option struck at $1.15 that expires today. Half a cent higher is another expiring option for about 785 mln euro. With little exception, sterling has been confined to a $1.27-handle this week. The euro is posting an outside down day against sterling after running out of steam near GBP0.9025. The lower end of the range is seen near GBP0.8950.    

North America

More than half of the FOMC spoke in recent days and although many pundits seem confused, with the exception of St. Louis's Bullard, it seemed like they sung from a common songbook. The new chorus line is "patience and flexibility." In Fed-speak this means that there will be no rate hike in March (patience) and it is not committed to any rate path (flexibility). The continued reduction of the balance sheet, which was not much of a focus when the S&P 500 was racing to record highs at the end of Q3, has now become the favorite whipping boy. In practice, while the Fed can be more patient with the rate hikes, it has not altered its balance sheet operations. Although the Fed does not know the final target size of the balance sheet, we suspect it will be reached either at the end of this year or the middle of next year at the latest. 

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Read more by Marc on his site Marc to Market.

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