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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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It's Monday, so it must be : Central Banks, Politics, Oil, Stocks and China ..... just like any other day, then. ref :- "Five Things You Need to Know to Start Your Day" , Bloomberg

March 13, 2017

 

 

 

ref :- "Five Things You Need to Know to Start Your Day" , Bloomberg

 

Another busy week in store for central banks, and naturally most attention is focused on the US Federal Reserve who make their policy decision on Wednesday. Mind you, it's not one of those "Will they ? Won't they ?" situations. As we've discussing for some time, a 25bp rate hike is near enough guaranteed, especially after Friday's strong employment data for February : Non-farm payrolls +235,000, Unemployment rate 4.7% (from 4.8%), Ave. Hourly Income +2.8% year-on-year.

 

A hike being fully expected, of greater interest will be the Fed's thoughts on future policy, and how many increases we are likely to see this year  --  three, which not so long ago looked ambitious and is now widely accepted ? Or four, which is now a 25% probability and climbing ?

 

Against that kind of background, why has the dollar been on the defensive at the end of last week and again this morning ( € / $  above 1.07 at one point earlier today) ? Well, obviously a hike is fully built in to the market price but more importantly traders are still mulling over last week's statement after the European Central Bank's "No Change" decision. ECB boss Mario Draghi did strike a slightly hawkish tone for a man who in SOME quarters is seen as being on the cautious side. Reports that ECB also discussed the feasibility of raising rates whilst still continuing their current bond purchasing programme suggest that the days of the ECB's ultra-accommodative  monetary policy may be numbered.

 

The Bank of Japan and the Bank of England also meet on Thursday, with no changes to current policy expected.

 

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The Dutch election takes place on Wednesday just as the diplomatic row between the Netherlands and Turkey becomes increasingly bitter. The spat over whether Turkish ministers should be allowed to seek the votes of Turkish immigrants in Holland over a domestic Turkish issue can be expected to boost wavering support for populist anti-Islam Freedom party leader Geert Wilders, in that it plays right into perceptions that the immigrants bear far greater allegiance to Turkey than the Netherlands. PM Rutte's showings in the polls may have fallen in recent weeks, but he too has gained praise for his firm handling of events and he may also benefit from the affair.

 

Any increase in support would be very welcome. Because a coalition government is inevitable in Holland Mr Wilders, even if he should receive the most votes, could never form a government since no other major party would go anywhere near him never mind get into bed with him. That means the leading candidate apart from Mr Wilders will be in prime position to lead a new coalition.

 

So whatever happens Mr Wilders won't be the next PM of the Netherlands, but the vote will be closely watched as a bellweather measure of support for populist parties throughout Europe.

 

In the UK, it is thought that the government will be able to overcome the difficulties presented by the House of Lords and rebels in its own party to push through the Article 50 Bill today, and could trigger the Brexit process as early as tomorrow. To no one's great surprise, that prospect has just prompted SNP leader Nichola Sturgeon to call for a second referendum on Scottish independence.

 

Whether sterling will continue on the back foot once the process is triggered, or will benefit from the clarity that a formal declaration would provide, is unclear at this time.

 

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What's happened to oil ? That's what all those oil bulls might be asking as West Texas Intermediate goes crashing down through $49  (so much for the $50 - $55 range). In fact, those bulls were a major part of the problem  --  the deal to cut production by both OPEC and some key non-OPEC producers encouraged speculators to take big long positions in the market. But the upside potential provided by the OPEC deal has been countered by increasing production elsewhere, particularly in the US where shale oil producers have reacted to higher prices by bringing previously mothballed rigs back into service.

 

The US is now knocking out more than 10m barrels per day, more than Saudi Arabia, and inventory levels in the US are repeatedly recording record highs. This was not what speculative oil longs had in mind when they bought the oil market, and the rush for the exit has pushed prices down through the bottom of what had looked like a well-established range.

 

It seems obvious to outside observers that if there is to be any chance of the oil market coming back into balance the OPEC deal will not only have to be extended well beyond its 6-month time frame but compliance, reportedly running at about 50% in the non-OPEC producers that signed up for the deal, will have to be much more strictly enforced. That, as we now, is an extremely difficult thing to do. 

 

The newly-exporting United States has taken over Saudi's role as "swing" producer. It was OPEC in general and the Saudis in particular who turned on the taps to knock the shale oil producers out of the game, so one wouldn't expect the new boys to  shed too many tears at the difficulties faced by others now that they have are back in business. They will however have to consider the fact that if prices continue lower then soon  many of their shale rigs cease to be economically viable operations once again. It's all a question of balance

 

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Stock markets are pretty flat , so time to point you to "Bubble-spotting", a leader in this week's Economist. By some measures soaring stock markets in the US (driven by "Trumpflation" and its perceived effects on equities), the UK (the FTSE 100 driven by cheaper sterling) and elsewhere resemble some of the crazy valuations seen at times like the dotcom bubble. By other interpretations however, they don't. 

 

The Economist gives both points of view, and is well worth a look.

 

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"The Chinese economy is showing signs of improvement with little risk of a hard landing", or so say Chinese officials. "Well they would, wouldn't they" some might say, but as it happens the likes of Goldman Sachs agree with them. Most of the rest of the world will hope they're right.

 

Elsewhere, debt within China remains a massive problem, but moves to make the domestic bond market more accessible to foreigners and the resulting capital inflows may provide some support to the authorities in their battle to discourage outflows.

 

If so, it would also be supportive of the yuan/renminbi. Whether it could influence the new US administration's view's on Chinese manipulation of foreign exchange markets must be open to doubt, however.

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