Markets Outlook: Central banks in focus

Market highlights

• Markets to sweat on significant central bank meetings, including Fed, BoE and BoJ
• Macro focus on Brexit, stimulus and commodities reflation, but big risk looms on the horizon with Georgia runoff race polls
• Investors still listening hard for pre-Christmas stimulus mood music

The Week Ahead

The coming week for markets sees a calendar packed with events, including significantly important central bank meetings from the Federal Reserve, the Bank of England and the Bank of Japan. Several important political events also take place, with Sunday being the latest deadline in the Brexit talks, before the US Electoral College formally casts its votes for President on Monday.

The dollar bears will need to keep an eye on the Fed (Dec 16) as the Fed speak has started to sound more hawkish from a low base (vaccine optimism, mention of taper – even if to say it will not happen anytime soon), while recent jobs data (payrolls, claims) has disappointed. They’ve given no clear signal on whether they could extend asset purchases, making this potential outcome a shot in the dark.

In other central banks, we get the BOE (Dec 17), BOJ (Dec 18) and SNB (Dec 17), though no large changes are expected. We also get the next round of global PMIs (Dec 16), IFO (Dec 18), and US Philly Fed (Dec 17), where the recent ZEW survey in Europe bounced on vaccine optimism. Also, RBA minutes (Dec 15) and employment data (Dec 17) come out in Australia, where AUD has outperformed on the commodities rally.

Still, the big risk looms on the horizon where Georgia runoff race polls will be a focus. Betting market-implied probabilities for the Republicans have stabilized (68% for the regular race, 65% for the special), and the overnight vols have started to move a little lower.

For the moment, the macro focus has shifted to Brexit, stimulus and commodities reflation. Still, those all-important Georgia races will undoubtedly come back to the forefront as we approach year-end.

The USD closed stronger on Friday, supported by safe-haven bids around Brexit, fading US fiscal stimulus hopes and Covid-19 challenges in Europe.

In truth, the headlines on the US fiscal stimulus are all too familiar, but there’s little sign of any movement in resolving divisions over the primary components. Squabbling continues over government aid to US states and Covid-19 liability protection for businesses. Given these talks have been running since July, the market may be bored to tears. But if the stimulus door slams shut before Christmas, it could still change the mood music from Joy to the World to Jingle "Hell's" Bells. 

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