Markets Overview: (Source: Bloomberg, FT, Reuters, DJ Newswires)

UK 100 called to open -25pts at 6665, held back by a negative US finish and depressed Asian session ex-Japan after the Fed’s FOMC minutes raised expectations of a tapering of QE3 sooner than markets might be expecting (coming months?), helping keep US markets from their recent highs and UK futures under 3-week pressure.

The minutes showed tapering could come within the next few meetings on better data (although there was little change to economic assessment), with agreement that a lowering of the overnight interest rate on banks’ excess reserves and a lower 6.5% unemployment threshold would be worth considering to help offset reductions in asset purchases.

The Fed continues to distinguish tapering from rate rises after the bad reception the idea of tapering got from the markets in the summer. We did wonder yesterday, with much build-up talk of patience before rate rises, thresholds not triggers and other measures to help maintain easy policy without QE3 at full throttle, was setting us up for an early move.

Nonetheless, to keep things interesting, the Fed’s Bullard said tapering would only take place of the economy strengthened and that a lowering of thresholds would damage credibility. We still see a muddied message on timing. Data dependency holds, and we doubt it will improve fast enough for tapering before late Q1. More likely early Q2.

Expect continually dovish talk from Chair and replacement, and mixed messages from others. Expect continued talk of tapering soon, but ultimately continued delays. As we have been saying – all part of managing expectations and avoiding dangerous easy money-fuelled bubbles.

US markets closed lower to the tune of 0.4%, and Asia ex-Japan is following suit after China’s HSBC PMI Manufacturing weakened more than expected after a decline to 3-month lows for export orders. Japan has rallied after the BoJ left minutes unchanged (keep expanding monetary base) and weaker JPY saw USD/JPY rally back above 100, close to testing the 101 level not seen since July.

In focus today, we have preliminary PMI Manufacturing and Services for France, Germany and the Eurozone with very minor improvements expected and all above 51, bar France Manufacturing seen remaining sub-50. UK CBI Sales trends seen mixed.

In the US, Jobless Claims seen largely unchanged, PMI Manufacturing improved but Philadelphia Fed taking a knock. Eurozone Consumer Confidence seen improving but only by a notch. Plenty of ECB/Fed speakers still knocking around, along with ECB President Draghi and German Chancellor Merkel.

UK 100 still under pressure via falling 3-week highs at 6720. FOMC minutes took futures down 60pts away from the falling trendline and they now sit only 50pts from mid-November lows of 6610. Still possible this is a correction within long-term uptrend, but break of 6720 needed.

In FX, USD basket strengthened sharply from 80.6 to 81.2 on prospect of QE3 tapering sooner. Potential resistance at recent highs 81.5.

GBP/USD back from 1.615 on stronger USD. Long term falling highs still major resistance at 1.625. EUR/USD had already broken below 11-day rising support after talk of ECB negative deposit rate for bank reserves. FOMC minutes exacerbated this. Support found 1.3425. USD/JPY regained 100, to near 101 after BoJ policy updates.

Gold maintained its declines to fell below $1270 after some big sell orders and then below $1250 on the Fed minutes fuelled stronger USD. Still under huge pressure from late October with a distinct lack of interest in the now tarnished yellow metal. Still possible that weakness persists for a visit of $1200.

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