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Extreme Ruble Volatility Shocks Markets, Again

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

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It was another day of extreme volatility in the Russian ruble. After an emergency rate hike by the central bank last night that took the country's key rate to 17% from 10.5% - an unprecedented step that was the second largest in history by a central bank - the ruble fell as much as 23% during today's session.

Major commercial banks with dealings in Russia and non-bank entities all ceased dealings in the ruble because of the extreme volatility. That, plus speculation that the Russian central bank was selling Treasuries rather than sell US dollars helped offset the decline in the ruble. By the close of official trading the ruble was only down 5.72%.

The fall in the ruble sent a wave of panic into Western equity markets before the US session opened. Futures on the S&P 500 (SPX) fell more than 1% in early trading and the 5yr Treasury rallied by as much a 14bps, which was eerily similar to the action on October 15. However, markets generally recovered after that point and staged an explosive rally that had the SPX trade up as much as 1.36%. Then, just as quickly as the buying had returned, it suddenly disappeared and the SPX finished down 0.86% on the day with heavy selling in the after hours session too, leaving traders generally frustrated with the action.

Crude oil weakness early in the day was another catalyst for the decline in global risk assets. West-Texas intermediate was down 4.13% by 9:00am ET. However, speculation that Russia may institute capital controls, which may ultimately decrease the supply of global crude oil caused a 6.6% reversal in the following two hours, and ultimately it finished flat.

Similarly, high yield spreads continued to show weakness with spreads eclipsing 600bps for the first time since the summer of 2012.

Tomorrow's Financial Outlook

The main event tomorrow will be the FOMC rate decision, which is scheduled for 2:00pm ET. A press conference by Fed Chair Janet Yellen will follow 30 minutes later. In surveys, more than 80% of market participants believe that the Fed will drop the "considerable time" language from its statement, which will indicate that it sees its first rate hike in eight years on the horizon. However, price action lately in interest rates would seem to indicate the survey results and positioning is diametrically opposed.

The US November consumer price index report will be released in the morning. Prices are expected to continue to decline by 0.1% in the month to a 1.4% annual rate, down from 1.7% in October. Core prices are expected to remain unchanged at 1.8% year-on-year. If core prices were to not rise as much as expected it could cause a negative reaction in markets.

Globally, the UK will release its November employment data in the early morning. Prices in the UK dropped to 1.0% year-on-year in a release today. The average 3-month unemployment rate is expected to decline modestly to 5.9% from 6.0% in the month prior. Also scheduled for release are Japan's trade balance, final German CPI for November, and the Bank of England minutes from two weeks ago.

Fedex (FDX) will be the first major company to report earnings from the fourth quarter tomorrow. General Mills (GIS), Joy Global (JOY), and Oracle (ORCL) are also scheduled to report.


Twitter: @MichaelSedacca

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