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Daily Market Report 12/01/2012

European Shares
The markets have been rather quite this week with the European indices seen flat this morning ahead of the Spanish debt auction and the ECB policy decision. The warnings from Fitch relating to the Euro zone and the comments from Italian Prime Minister that a rate cut would be welcome, fuelled the talk of contagion within the euro area, making the ECB decision a lot less clear cut than it seems. Although no further interest rate cut is expected, the traders will be closely watching the ECB President Draghi’s press conference following the announcement, with the most crucial issue at hand the outcome of the LTRO. Should the ECB allude to possible future steps to increase support for debt-stricken countries, reassuring investors that a last resort mechanism is in place to prevent big economies from defaulting, risk appetite is likely to increase giving European indices a strong push. If, however, the ECB moves the responsibility once again to the EU official, European markets could be dragged down heavily.
FX
The currency market has consolidated ahead of the upcoming ECB interest rate decision with the euro trading slightly lower this morning. The selling pressure on the single currency doesn’t seem to have abated and this weakness puts it in a downward negative trend. The EUR/USD is hovering around 1.271 at the time of writing, but no major change is expected before the ECB policy meeting.
Commodities
The commodity markets are also quite today ahead of the Spanish bond auction and the ECB meeting. The precious metal built on gains from the previous two sessions today. It looks like the safe haven status of the yellow metal has returned as the euro zone debt crisis continues with no solution in sight. At 1646 this morning key levels to watch are 1678 to the upside and 1566 to the downside. Brent crude is trading steady at $113 but as the tensions between Iran and the West mounts, further strength that could push the black liquid to record highs should not be ruled out.
Today’s Calendar
All eyes will be on the ECB interest rate decision today. The ECB is expected to leave rates unchanged at 1%, with some sources suggesting the need for a rate cut given the severity of the Eurozone crisis. On the economic front, Eurozone inflation data and UK industrial production are the key releases during the European hours. The Spanish auction is not expected to be particularly market moving, as traders will be waiting for the ECB policy decision before making directional commitments. The BoE’s policy decision is also on tap today, but until the current round of asset purchased is completed, no big news are expected from that side.

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