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

UK 100 called to open +5pts at 6725, after US markets closed mixed following US Federal Reserve FOMC minutes from December (at which it announced tapering of QE3) showing the central bank plans to ‘proceed cautiously’ in its reduction of asset purchases, thanks to economic improvement, but with no pre-set course and thus no hurry/quick exit.

Of note was a majority of officials seeing diminishing returns from the extraordinary stimulus and support for a cautious taper path, as well as the absence of desire to reduce the unemployment threshold which markets would have taken as a sign of proof rates would stay low for longer. The committee is still eyeing easy-money bubble risks though.

Equity futures largely unmoved, not signalling fear of less cheap money, nor taking it as solid proof of US economic recovery. That said, the end-of-year equity rally would suggest the optimistic element already priced in, hence the lack of gains from a better than expected ADP jobs report ahead of the NFP tomorrow.

Overnight, stocks in Asia mostly lower with Japan’s Nikkei dented by a stronger JPY even if off its worst levels and in a narrow 2-day range. In China and Hong Kong, sentiment dented by lower mainland inflation. Even if it means more scope for reforms and stimulus, questions over slowing growth remain.

Looking ahead, it’s still all about the central banks today with the BoE and ECB updating on policy. No change expected from either, but the latter is seen retaining flexibility for stimulus if necessary given the threat of dis-inflation. Any updates on forward guidance from either would be interesting.

Data-wise, the UK Trade Balance should have narrowed slightly, while Eurozone Confidence surveys could show improved sentiment in December. After better German Factory Orders yesterday, there is scope for Industrial Production to surprise to the upside in terms of rebound. US jobless Claims seen pretty much unchanged.

More Christmas updates out this morning from the UK show Marks & Spencer (MKS) disappointing even if it avoided an official profits warning. Food good but clothing suffered. After Sainsbury’s (SBRY) failed to inspire yesterday with only a slight rise in like-for-like sales, Tesco (TSCO) shows a big fall and at WM Morrison (MRW) things were even worse and management now sees underlying profits at the bottom end of expectations.

The UK 100 is back in the lower half of its 6700-6775 range since Christmas-eve. Daily momentum has now gone negative, but cautious optimism looks to prevail, with many defensives rather than risk-focused stocks holding things back yesterday. Watch levels 6713 and 6740.

In FX, the USD index remains in its 2-week uptrend with support at 81.1 thanks to the prospect of QE3 tapering. GBP/USD a bit stronger back testing 1.645 ahead of BoE update. EUR/USD under pressure despite regional optimism. USD/JPY narrowing in its range around 104.9.

Gold hanging around $1220-1230 unable to gain any traction. Still in downtrend. Resistance still at $1250. The price of Oil saw some divergence yesterday with US light Crude taking a dip lower to $92.2, well below recent $100 highs, despite an in-line with expected inventory draw-down. Brent Crude maintained its gradual rise from recent $106.5 lows although resistance still at $108.

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