Previewing today's market: near record low liquidity, with chance of ridiculous volatility in the Ruble, energy and equity markets.

While no doubt today's main event will be the "considerable" FOMC announcement and the Fed's downward-revised economic projections followed by Yellen's press conference, what traders will be most excited by is that, finally, Jim Bullard will no longer be bound by the blackout period surround FOMC decisions, and as such can hint of QE4 again at his leisure during key market inflection (i.e., selling) points.

FOMC aside, overnight markets were shaped by the now usual suspects: declining energy, with WTI trading again below $55 at last check, and Brent also back below $60. One of the drivers for today's weakness appears to be a late digestion of yesterday's story that Russia will race OPEC to the bottom with "plans to boost daily oil exports in the first quarter of 2015 by 6.6 percent to 52.32 million tonnes, quarter-on-quarter, according to Reuters. This follows WTI closing higher (even if literally by pennies) for the first time in a week yesterday, however today’s European session has so far seen both WTI and Brent crude back under selling pressure, with the stronger USD combined with yesterday’s API Crude Oil Inventories showing a build in crude stockpiles of 1.9mln weighing on oil ahead of DoE inventories.

As for the RUB, things appear to have stabilized a bit even if the intraday gyrations remain, and the USDRB was trading a little below 68 at last check, while more and more brokers simply refuse to trade the Russian currency, in line with what was first reported here yesterday.  One of the factors leading to the stabilization is that the Russia finance ministry announced it would start selling its own FX reserves on market leading to a brief ruble rally vs USD. Also, PM Medvedev added that order must be brought to Russian FX market, while Kremlin economic aide Andrey Belousov said that Russia was working to stop ‘bacchanalia’ on FX market, according to Interfax. In other Russian news, Sberbank will raise FX, ruble deposits rates starting tomorrow, while president Putin plans no ‘special statements’ on markets, Kommersant says.

Over in Asia, equities traded mostly higher as oil prices saw a brief respite from the ongoing downturn during yesterday’s session. The Nikkei 225 (+0.4%) snapped its 2-day decline as JPY weakened ahead of the Fed rate decision although at last check it has reverted to trading back around the 117 USDJPY tractor beam moderating the zero liquidity exuberance in S&P futures.

Elsewhere, the Shanghai Comp (+1.31%) touched a 4yr high led by financials and brokerage names, following reports that China may loosen capital restrictions on brokerages. (read "Chinese Investors Bet This Time Is Different as Stocks Surge") Money market rates are also notably higher amid a liquidity shortage further stoking expectations of a PBoC intervention. The Hang Seng (-0.3%) fell on casino stocks weakness as Fitch said sees Macau gaming revenue negative in 2015 and reports of a possible China crackdown on Macau casinos. China’s central bank has issued short-term funds to some local banks to ease liquidity strains and has also renewed some banks medium-term lending facilities that have expired, according to sources familiar with the matter. (RTRS) This has prompted some analysts to suggest that this action reduces the probability of a RRR cut before year-end.

European equities trade in the red following from the negative Wall Street close as lower oil prices combined with the depressed economic climate in Russia weighs on stocks. In a relatively quiet session with all focus on the FOMC rate decision, position squaring has been observed boosting the USD-index back above the 88.00 handle with the market looking to see whether the Fed drop their ‘considerable time’ rhetoric. In Fixed income markets, Bunds have remained relatively flat due to a lack of major macro news.

Also of note, the Greek presidential vote begins today at 1700GMT/1100CST with the govt. expecting its candidate Stavros Dimas to receive at least 161 of 300 MP's votes, short of the 200 needed to be elected but a basis for a coalition to work for final ballot Dec 29th.

Looking ahead, all eyes will be on the FOMC rate decision, also we get US inflation data with CPI expected to print -0.1%, while CPI ex food and energy are expected to rise 0.1%, below last month's 0.2% increase.

Market wrap summary

European stocks drop lead by banks and industrial companies. Asian shares decline, U.S. stock index futures advance. Euro drops against dollar, WTI crude oil falls as Russia reiterates it will keep crude production steady. Fed to end 2-day meeting and economists expect it to drop a vow to keep interest rates low for a  “considerable time.”

• S&P 500 futures up 0.6% to 1976
• Stoxx Europe 600 down 0.6% to 327.06
• US 10Y yield up 3bps to 2.09%
• German 10Y yield little changed at 0.59%
• MSCI Asia Pacific down 0.4% to 133.86
• Gold spot little changed at $1196.89/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

• Dampened economic sentiment and a continued slide in oil prices weighs on European equities.
• USD-index strengthens as market participant position square ahead of the latest Fed policy announcement
• Treasuries decline, 10Y and 30Y yields retreat from YTD lows before FOMC statement and summary of economic projections at 2pm, Yellen press conference at 2:30pm.
• Fed seen likely to drop “considerable time” language,  may address recent global market turmoil
• Russia struggled for a second straight day to reverse a rout in the ruble, with Finance Ministry selling its FX on the market;  Sberbank, Russia’s largest lender, to raise FX and ruble deposit rates starting tomorrow
• Fallout from Russia’s crisis is spreading across markets: Pimco is facing mounting losses on its Russian bond holdings almost every bullish ruble option contract registered in the U.S. has been made worthless; and forex brokers in New York and London told clients they’re no longer taking ruble trades
• The Bank of Russia will probably intensify interventions and spend almost a sixth of its reserves ($70b) after its emergency increase of interest rates failed to stem the ruble’s worst crisis since 1998, according to a survey of economists
• The biggest causes for worry, according to SLJ Macro’s Stephen Jen, bigger than a recession in Russia or the oil-price plunge: the slowdown in China, which has already upended commodity prices, and likelihood U.S. growth will propel USD higher and suck assets out of emerging markets
• German govt to sell EU185.5b in bonds and bills in 2015, lowest level since 2002, Federal Finance Agency says in provisional calendar; may sell 30Y linkers for first time next year
• PBOC rolled over at least a portion of a three-month lending facility from September that was set to expire, according to a government official familiar with the matter
• A federal judge weighing whether an immigrant from Honduras should be deported said Obama’s executive order on immigration is unconstitutional and violates the principle of separation of powers
• Taliban militants vowed more strikes on Pakistan’s army if it doesn’t halt operations along the Afghan border, a threat that comes a day after the group slaughtered young students in one of the country’s deadliest attacks
• No IG or HY deals priced yesterday.
• Sovereign yields mostly higher. Asian stocks mixed, European stocks fall, U.S. equity-index futures gain. Brent crude falls 0.8%, trades below $60/bbl level; copper declines, gold little changed

US Event Calendar

• 7:00am: MBA Mortgage Applications, Dec. 12 (prior 7.3%)
• 8:30am: CPI m/m, Nov., est. -0.1% (prior 0.0%)
  • CPI Ex Food and Energy m/m, Nov., est. 0.1% (prior 0.2%)
  • CPI y/y, Nov., est. 1.4% (prior 1.7%)
  • CPI Ex Food and Energy y/y, Nov., est. 1.8% (prior 1.8%)
  • CPI Core Index SA, Nov., est. 239.485 (prior 239.162)
• 8:30am: Current Account Balance, 3Q, est. -$97.5b (prior - $98.5b)

Central Banks

• 4:30am: Bank of England issues minutes
• 2:00pm: FOMC seen maintaining overnight bank lending rate between 0% and 0.25%; release of summary of eco projections
• 2:30pm: Fed’s Yellen holds news conference

FX

In FX markets, AUD/USD initially reached June’10 lows of 0.8140 after tripping stops allied by the subsequent USD-index strength despite this AUD/USD has since come off worst levels. NZD was dragged lower in sympathy, further weighed on by comments from RBNZ assistant governor McDermott, who reiterated the exchange rate remains unjustifiable and unsustainable. Separately, GBP was relatively unmoved following the BoE minutes vote remained at 7-2 and a broadly in line UK jobs report. Elsewhere, Russian news agency Interfax reported that the Russian Finance Ministry would sell USD 7bln worth of FX stocks to the market, while the Russian government and Russian Central Bank announced that they have worked on packages of additional measures for the RUB.

COMMODITIES

In the energy complex, WTI and Brent crude remain under selling pressure with the stronger USD combined with yesterday’s API Crude Oil Inventories showing a build in crude stockpiles of 1.9mln. Looking ahead, the DoE Crude Inventories data release is expected to show a drawdown of -2.25mln/bbl. Elsewhere, copper prices traded lower overnight following the release of yesterday’s production figures from China which showed output of the red metal rose by 3.1% M/M to a record for its 4th consecutive month, while the benchmark China iron ore prices extended on its declines for the 8th day with prices near this year’s low

DB's Jim Reid shares his thought on the overnight even summary

The Fed, Greece, Oil, EM and Russia stole my Xmas. The European economics team and my team had their annual joint Xmas lunch yesterday (in collaboration terms think Aerosmith and Run D.M.C.) but because of the EMR and the above key themes I made a polite exit at around 5.30pm to keep a clear head to be able to try to make sense of everything that is going on. For all I know the lunch could still be in progress!!

Two of these stories see major developments today with the first round of the Greece presidential election and the much anticipated FOMC meeting. Indeed in just over 12 hours we may know a lot more about how brave the Fed actually are which will have a lot of pointers to their behaviour in 2015. One of the trillion dollar questions for 2015 is whether the Fed are going to try to ignore markets and attempt to start normalising rates. Alternatively are they going to have to acknowledge that they are now hostage to trillions of dollars of global investments that have been directed into various assets due largely to their (and other central bank's) extraordinary policy over the last few years. We'll get clues today and it will be fascinating to see the tone of the statement and Yellen's press conference. Overall we think they are still hostage to markets and will struggle to raise rates in 2015 but we might get some frights along the way as they do want to tighten. Given recent turmoil in global markets our gut feeling is that tonight will be a fairly dovish meeting. They might save the hawkish rhetoric for a meeting where markets are more stable.

If that isn’t enough we’ve also got the November CPI print in the US this afternoon to look forward to. Our US colleagues expect the headline reading to drop to -0.2% mom (vs. -0.1% expected) and the core to remain unchanged at +0.2% mom which is a tad above market expectations (+0.1%). They note that although inflation expectations have dropped - most obviously through the declines in the oil market and subsequent fall in the 5y/5y forward inflation rate to recent lows – recent macro data perhaps paints a more mixed picture with the University of Michigan survey showing a 0.3% rise in LT inflation expectations whilst the Philadelphia survey showed a slight decline in projected inflation forecasts. It’ll be interesting to see if today’s print causes any material changes to the language used around inflation in the FOMC statement.

It was a wild day for financial markets yesterday with volatility in most major equity benchmarks as oil prices swung back-and-forth and the Russian ruble traded with extreme volatility. Starting with the latter, following the overnight rate hike by the Central bank of Russia, markets opened with some hope in early trading as the ruble opened around 9.7% firmer and traded back below 60 in the first hour of trading. The better sentiment appeared to be short-lived however as by lunch-time the currency touched its lows of the day at 79.2, an intra-day day swing of nearly 36% with speculation over capital controls for the currency weighing on sentiment. The currency firmed up into the close however following comments from the Economy minister Ulyukayev who denied any potential controls but still closed 5.72% weaker at 67.91 to the Dollar. Russian government bonds didn’t fare much better, 10yr benchmark hard currency yields closing 40bps wider at 7.59% and local currency yields 286bps wider to 15.88%. The dollar-denominated RTS Index declined 12.41% - the biggest one day fall in six years and is now down nearly 57% YTD. The moves also came at the same time as the FT reporting that President Obama is due to sign a bill authorizing fresh sanctions on Russia – although the article suggests that the bill will have little immediate impact and instead allows Congress to impose tougher sanctions on Russia next year should we see further escalation in the Ukraine crisis. With the dramatic moves in the currency, Russian banks in particular suffered yesterday with Sberbank (-21.60%) and VTB Group (-13.48%) declining sharply in London trading. State-owned Gazprom closed 11.78% lower. The moves have also caused Apple to halt online sales in Russia.

Over in the US the S&P 500 finished -0.85% yesterday following a volatile day in oil markets in which WTI (+0.04%) and Brent (-1.96%) closed at $55.93/bbl and $60.01/bbl respectively. Both grades have declined 1-2% again this morning. The volatility in US equities was evident by a 2.2% intraday trading range which saw the index open some 0.6% weaker before paring those losses to trade at a high of 1.4% as energy stocks recovered, only to then retreat through the afternoon session and close in negative territory as oil backtracked. The initial weakness largely came about following a set of soft macro releases with housing market data largely disappointing. Both November housing starts (-1.6% mom vs. +3.1% expected) and November building permits (-5.2% mom vs. -2.5% expected) came in below consensus. The December flash manufacturing PMI also came in below expectations at 53.7 (vs. 55.2 expected) – marking the fifth consecutive fall since August's 3 year high. The energy component of the S&P 500 actually closed as the top performing sector (+0.7%) despite WTI trading from anywhere as low as $53.6/bbl to as high as $57.2/bbl intraday. Credit markets closed modestly softer whilst Treasuries ended firmer although they also swung around with moves in the ruble. Benchmark 10y yields closed 5.9bps tighter at 2.059% - having touched a low of 2.009% as the ruble traded at its intra-day lows.

Closer to home, European stocks also traded with notable volatility although the Stoxx 600 closed +1.73%, fuelled by a turn-around in energy stocks (+3.31%) over the last two hours of trading. This was before the late US sell-off started though. Data was modestly stronger which helped. Although both preliminary euro-area December PMI manufacturing (50.8 vs. 50.5 expected) and services (51.9 vs. 51.5 expected) prints came in ahead of expectations, on a regional basis the readings were more varied. In Germany manufacturing (51.2 vs. 50.3 expected) was stronger, however services (51.4 vs. 52.5) disappointed. In contrast, the French manufacturing print (47.9 vs. 48.6 expected) came in below consensus, but services (49.8 vs. 48.5) was a beat. UK CPI was soft, the core reading dropping to 1.2% yoy from 1.5% previously and back to levels last seen in 2008. Elsewhere the December German ZEW survey was strong, with expectations of 34.9 rising from 11.5 in November – the strongest reading since April. Bunds closed firmer, the 10y benchmark extending its record lows in yield to close 2.7bps tighter at 0.596%.

Staying in Europe and focusing on Greece, ahead of the presidential election today there was further pressure on Greek rates yesterday with 3y and 5y yields widening a further 57bps and 80bps to 10.83% and 9.90% respectively. The ASE closed 0.26% lower. With regards to today, voting starts at 5pm GMT and results will be known within the hour. In terms of the outcome to the vote, DB's George Saravelos is expecting around 165 yays, way short of the 200 required today and the 180 required in the third round on December 29th. George doesn't think that this would preclude a positive outcome in the third round (some MPs could easily change vote), but it would highlight how difficult it will be to get there. His baseline is that we don't and there being an 80% chance of an early general election.

Quickly refreshing our screens this morning, bourses in Asia are generally firmer. Having opened softer the Nikkei is now +0.36% as we type, supported by a smaller than expected November trade deficit print. The Shanghai Comp (+0.45%) has extended its 3-year highs although the Hang-Seng is 0.36% lower - dragged down by gaming names following news that China is set to crackdown on illicit money channeling in Macau.

Looking ahead to today’s calendar and away from the CPI print and FOMC meeting we’ve got the BOE minutes as well as various employment prints for the UK as well as the final November CPI reading for the Euro-area and trade data in Spain.