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

UK 100 called to open -10pts at 6510 after US equities posted decent gains but failed to produce the same magnitude of progress as in Europe after a more festive mood took hold ahead of the FOMC meeting, with increasing belief in another taper delay – despite some more encouraging US and European macro data.

US markets buoyed by data including an Industrial Production Rebound, an increase in Capacity use, a solid PMI Manufacturing reading and an increase in Non-Farm productivity. Nonetheless, having been so focused on growth being taper positive, market consensus continues to shift towards the Fed waiting until early next year for more data to confirm progress and trend before making a decision on stimulus reduction.

With political progress also a potential taper driver, note continued positive noises regarding budget negotiations and getting the bill through the Senate this week but the White House saying President Obama’s remains against negotiating the debt ceiling (February hurdle). This is likely in response to reports that Republicans may start asking for more in return for the current bipartisan budget deal. Another crisis on the horizon?

In Asia overnight, equities mixed with Japan’s Nikkei posting similar gains to the US and the regional index rebounding from a 3-month low, but Hong Kong and Australia more subdued the latter on a projected bigger budget deficit. Macro data was thin on the ground albeit positive with Aussie Conference Board Leading Index improving and Japanese Machine Tool Orders solid. The RBA was a little less dovish, but left the door open for a rate cut and maintains stance on too strong AUD.

In Europe, after Ireland exited bailout shackles, note Portugal passing its tenth Troika review. Note also Draghi’s warning to Eurozone members that a banking union must avoid over-complexity and must focus on efficiency of decision making ability, to avoid contagion. He also reiterated that forward guidance was in place with only modest growth seen in Q4.

In focus today we have UK inflation data with CPI seen unchanged in November, but core ticking up. Remember recent BoE/GFK 12, 24 and 36-month inflation expectations have increased to well above trend (>3.4%). PPI seen less weak for input and rebounding for output. UK CBI Sales data seen unchanged in December.

In the Eurozone, CPI seen confirmed negative in November and below 1% for the year, well below 2% target and supporting need for recent rate cut. ZEW surveys for Germany are expected to deliver improvements in-line with the recent better PMIs than neighbours. US CPI seen slightly stronger in November (core solid) but not quite taper inducing. A US housing Index expected to have ticked up.

After a 2% bounce and move back up through 6500, the UK index has pulled back a bit after meeting a trendline of falling highs around 6530. The round number 6500 has yet to be tested, meaning a chance that it serves as support. Reversal signs teasing us but major falling highs at 6620 need to be broken in order to put paid to the 6-week corrective trend that has dogged the index since end-October.

In FX, the USD dollar index is holding around 80.2-80.4 ahead of the FOMC meeting suggesting potentially less concern about a taper. GBP/USD tested support around 1.63 after the string US macro data, but back up above overnight. EUR/USD still showing a desire to get back to 1.38. In commodities, Gold made a test of $1250 yesterday and looks to be benefiting from reduced taper fears (and lack of USD strength). Support $1220, resistance $1270.

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