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Simon Smith

OPEC blinks

Yesterday’s decision by OPEC to restrict oil supply has pushed the price of crude higher by some 5%. The move took the markets by surprise, with the divisions between Iran (who are still enjoying their return to global markets) and Saudi (who are cash-strapped) seen as too big to overcome at this point in time. This represents the first cut in production since way back in 2008, during the depths of the global financial crisis. No great surprise to see the currencies of the oil producers gaining ...

Simon Smith

Sagging Fed expectations

As discussed yesterday, markets will increasingly obsess about the US election over the coming few weeks, but beneath that the economy will determine if the Fed hikes interest rates before the year is out. After the last meeting, the chance of an increase in rates by year end was out over 60%, with that reading having now decreased to 50%. This shift in expectations has, in part, underpinned the weaker dollar seen over the past few sessions. For all the headlines about the election, the Fed is ...

Simon Smith

The US election beta

Having obsessed about an event that did not happen this month (a Fed tightening), markets now turn to obsessing about an event that will happen, namely a change of US President. To this end, the first of three live TV debates last night caught the attention of markets and from here on in, we are going to have to get used to a higher beta to the ebb and flow of US politics over the next few weeks. Interestingly, for what it’s worth, the Mexican peso was stronger on the back of the tone of the ...

Simon Smith

Brexit talks burdening sterling

The start of the week is seeing sterling breaking lower as the talk, from both the UK and also beyond, is of a ‘hard Brexit’. This follows on from the state of flux that has been in place since the vote back in June, during which the shape of Brexit has been very hard for anyone to determine. The issue is that such an approach creates a greater hurdle for businesses to overcome and also the ability of UK firms to passport business into the EU also looks under threat. Such headlines are giving ...

Simon Smith

Risk rating

The market is in need of a new narrative. The Fed meeting in December is too far off and for now, the US election is not something that entices excitement. With central banks on hold, markets are pushing the envelope in terms of risk, so pushing risk assets ever higher. Whether we are extremes is always up for debate. The German 10 year (not a risk asset) has been pushed below the zero level once again, but such moves have prompted rallies elsewhere. We’ve seen corporate bonds outperform, with ...

Simon Smith

Moving on from the Fed

The reaction seen in currency markets yesterday to respective central bank policy decisions was instructive of the change in dynamics that we’re seeing. The BoJ enacted a number of changes to its policy regime, which initially weakened the currency, but left it stronger by the close of play. Some of that move was no doubt down to market positioning, but it’s also reflective of a market becoming more and more doubtful about the ability of the BoJ to have any impact on the deflationary mindset ...

Simon Smith

Bank of Japan runs out of road

The Bank of Japan delivered a whole heap of nothing at its policy meeting today, although some adjustments were made to its policy framework. If you take the time to read through these measures, then the impression is of a central bank that has largely lost the monetary plot and is undertaking an ever more complicated and convoluted approach to monetary policy. The new regime is called “Quantitative and qualitative easing (QQE) with yield curve control” but there is also “QQE with a negative ...

Simon Smith

Sceptical equities

There was a definite yield differentiator on yesterday’s moves against the US dollar, which was generally in retreat. Those gaining the most were those with the highest interest rates, such as the South African Rand, the Aussie and also the kiwi. The Swiss franc and euro were less eager to join the party. This underlines the view that the market was getting more confident on the likelihood of the Fed keeping interest rates on hold at this week’s meeting. The other point of note was the modest ...

Simon Smith

Waiting for nothing

This week is all about what central banks aren’t going to do, but also the limited impact of what they’ve done already. The FOMC meeting in the US unlikely to produce a change in policy. Market pricing is now only places a 20% chance of a hike in rates this week and just over 50% chance of a hike before the year end. This could mean that the Fed chooses to come out with a steady rate decision, accompanied with a slightly hawkish statement, so as to effectively modestly tighten policy via their ...