Oil prices are having a rough time finding a bottom.

Photographer: Andrey Rudakov/Bloomberg

Keep Your Eye on Four Things This Week

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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There are lots of national and international issues to follow this week as the financial markets resume full functioning after the holiday break. At least four of them stand out in terms of potential market implications. 

U.S. Federal Reserve: The release on Wednesday of the minutes of its Dec. 16-17 policy-making meeting will shed light on why the Fed decided to fudge, rather than remove, language referring to the “considerable period” required for the unusually low level of U.S. interest rates.

Was economic weakness outside the U.S. the main cause of the Fed’s hesitation in unequivocally stating it would pull back from that policy?

Or were officials concerned about a “language tantrum” similar to the May-June 2013 “taper tantrum” that severely dislocated markets and undermined their functioning? As that market reaction showed (as well as one in September-October 2014), it doesn’t seem to take much to disrupt liquidity and cause sharp price movements.

Or could it be that the Fed has yet to develop sufficient confidence in the continued strengthening of the domestic economy?

The central bank’s signaling of the relative importance of these three factors has pricing implications, particularly for equities, corporate bonds, sovereign bonds and the value of the dollar versus other major currencies.

I suspect that the minutes, more than usual, will emphasize economic conditions outside the U.S. This would reinforce the already marked appreciation of the dollar while reassuring domestic investors that the Fed remains supportive of markets notwithstanding the strengthening of the U.S. economy.

Jobs: The underlying strength of the U.S. economy will be tested two days later with Friday’s release of the December jobs report. After the previous month’s strong numbers, and an equally “wow” revision to the third-quarter growth in gross domestic product, markets will be watching whether wages are rising along with continued robust job growth. 

I suspect this will be the case, confirming that the U.S. is able, at least for now, to decouple itself from economic weakness elsewhere in the world. All of this is likely to contribute to higher volatility in the foreign-exchange and bond markets. 

Greece: With Greek parliamentary elections scheduled for Jan. 25, markets will be monitoring the political rhetoric, in particular comments from Alexis Tsipras, the charismatic leader of the Coalition of the Radical Left (or Syriza), which polls suggest could emerge as the strongest party in Greece. While Tsipras is correct in pointing to the country’s excessive debt as one factor holding back a proper recovery, he is unfairly singling out Germany as solely responsible for excessive austerity policies in the euro zone.

The louder the voice from a surging Syriza, the greater the reminder to markets that, almost five years after the Greek debt crisis made international headlines, the euro zone has yet to deal credibly with its most acute economic and financial challenge. But, regardless of the economic fundamentals, don’t expect a return to the dark 2012 days of disruptive contagion.

A lot has been done within the euro zone to reduce the risk of widespread financial chaos. Instead, and after last year’s sharp and widespread compression, look for greater differences to emerge in the bond yields of some of the euro zone’s more vulnerable peripheral economies as markets pay greater attention to the reality of their divergent fundamentals. 

Oil: Having plunged by some 50 percent in six months, oil prices are having a rough time finding a bottom. They couldn’t even sustain a bounce in relatively light holiday trading from disruptions to Libyan supplies and growing political instability in Nigeria.

Investor and corporate positioning is still adjusting to what I believe is a consequential change in supply conditions. It will take time for the oil market to re-establish an equilibrium.

In the process, look for sovereign and corporate bond markets to remain concerned about the ability of vulnerable countries (such as Russia and Venezuela) and companies there to navigate sharp drops in government revenue caused by persistently lower oil prices. The ripple effects include a deepening recession, periodic currency pressures and growing inflationary forces. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Katy Roberts at kroberts29@bloomberg.net