Having looked at one stage last week as if we were well on course to post three successive weekly declines in a row, as equity markets across the globe tipped into bear market territory, few could have anticipated the abrupt about turn that came about at the back end of last week.

As it is we’ve probably seen one of the worst ever starts to a trading year, driven primarily by concerns around plunging oil prices, disappointing earnings, and slowing global growth, particularly in China and emerging markets. With oil prices also slipping to 13 year lows the correlation between the two has been the primary driver for some weeks now, with quite a bit of evidence that oil prices were at peak bearishness, as forward predictions for oil prices got steadily revised lower, on a daily basis.

This tends to be the time to become a little cautious and the late rebound in oil prices at the back end of last week does appear to bear that out.  The IEA’s warning last week that the oil market was “drowning in oversupply” may well have sounded dramatic, and no doubt accurate, but oil prices are already down 70% from their 2014 peaks and down over 50% from the May peaks last year, which suggests that a lot may already be priced in.

While it’s too early to call a bottom in oil prices quite yet the ferocity of last week’s rebound might suggest that we could well some nervousness creep in if we don’t slip back below $30 quite quickly, and potentially mark a recovery back towards $40 a barrel, especially with the cold weather now hitting the US eastern seaboard.

If this were to happen, then it could well be broadly supportive of equity markets as well, notwithstanding the helping hand extended by the European Central Bank at the end of last week, after ECB President Mario Draghi pledged “no limits” to the central banks determination to support economic conditions in Europe. Given that he said something similar prior to the December meeting at the end of last year, and then failed to deliver, there is a risk he could disappoint again, but for now markets appear to be buying the latest narrative, and extending last weeks rebound.

Attention will now turn to the US Federal Reserve and the Bank of Japan’s latest policy decisions later this week, with the main focus on the US central bank in the wake of last month’s historic decision to raise rates for the first time in nine years.

Looking back now while there are probably aren’t too many regrets amongst most policymakers, there might be at the tone of the narrative since then which has probably helped fuel the bad start to the year. With the US dollar as strong as it is, talking up the possibility of up to another 3-4 rate rises this year is optimistic at best and foolhardy at worst.

We’ve already seen St. Louis Fed President James Bullard express concern the inflationary expectations are weakening, and he was one of the loudest cheerleaders for last year’s rate rise. Given the current backdrop it would therefore not be a surprise to see US officials talk rate expectations lower, particularly given the recent economic weakness shown in some of the recent US data. We’ll get an early indication of that this week with the first reading of US Q4 GDP numbers, as well as a host of a number of economic indicators including durable goods.

On the data front today the only data of note is the latest German IFO Business Climate survey for January which has stayed remarkably resilient in the past few months despite concerns about the slowdown in Germany’s key export markets of China and Russia, and the sharp declines seen in the DAX since last year’s record highs.  Expectations are for a slight decline to 108.5 from 108.7.

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