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ECB Stays on Track; New Headlines Cause Two-Way Volatility


Today's financial recap and tomorrow's financial outlook.

Chinese equities were up very strongly overnight. The Shanghai Composite (SHCOMP) was up 4.12% for its strongest day since December 2012. The major Chinese index is now up 41% over the past four months. Trading volume, which had been more than double the monthly average yesterday, exceeded that figure today. For the third time in the past two weeks, the central bank did not drain liquidity from the system, which has amounted to a gain of about $15 billion over that time frame. Additionally, Chinese new accounts openings for the past week was the highest for the past three years and the highest sustained level on record.

The ECB kept rates on hold and did not announce any new policy measures. Its economic forecasts were revised down significantly for the next three years, as was expected by economists. Draghi did iterate a number of times that the ECB is discussing expanding its asset purchase program, but did not mention any specifics. Even though the meeting went generally as planned by market participants, the Euro rose, European equities fell, and US stocks were generally weaker.

Regardless of the actual decision, markets were whipsawed twice by different media reports. First, Bloomberg reported that according to two ECB officials the central bank is preparing to announce a QE package at its January meeting depending upon the evolution of economic data between now and then. The package would include all types of bonds, but no equities, and has not been finalized. Later in the day German newspaper Die Welt ran a story stating that ECB President Mario Draghi had more resistance from other board members to the idea of increasing the balance sheet over the next years through buying a wider variety of European bonds.

The S&P 500 (SPX) traded erratically today. Stocks initially dropped down as much as 12 points on the ECB news in sympathy to European markets, but briefly traded positive. A late selloff was nullified by strength before the close. By the end of trading the benchmark index was down  0.12% led by declines in energy and industrial stocks. 

Tomorrow's Financial Outlook

The major event tomorrow is the government nonfarm payrolls report. The market consensus is for a small revision higher for the October growth and a very slightly better than expected report for November. Economists expect nonfarm payrolls to grow by 230K in November and the unemployment rate to remain unchanged at 5.8%. Wages are expected to grow by 0.2% in the month and 2.1% from a year ago. Also to be reported tomorrow are October trade balance, consumer credit, and factory orders.

The other major report overnight is Europe's preliminary third quarter GDP. Growth is expected to be 0.2% from a quarter ago and 0.8% from a year ago, at the same rate as the second quarter. If growth is below consensus then it may give the ECB the cover to start new asset purchases at its January meeting. Also scheduled tomorrow is German factory orders, the Bank of England's 2015 inflation estimate, and Canada's payroll growth.

The only major earnings report scheduled tomorrow is Big Lots (BIG).

Twitter: @Minyanville

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