Category Archives: Big Picture

It’s oh so quiet…for now

Frequent u-turns in the Fed’s policy stance, central banks’ lack of monetary policy credibility, currency wars and gyrations in macro data are being blamed for financial market volatility and record lows in government bond yields. The forthcoming EU referendum has also buffeted UK financial markets.

But on the whole, financial markets and macro data have since 1 April showed a far greater degree of stability than in preceding quarters.

US interest rate, equity and currency markets have weathered the gyrations in the Fed’s policy stance and the ebbs and flows in US data. German and Japanese government bond yields have fallen but ultimately been less volatile than in Q1. The World Equity Index has also been constrained in a reasonably narrow range, thanks at least in part to signs that global GDP growth stabilised in Q1.

This relative stability has not been confined to the dollar. So far, Q2 2016 has been the least volatile quarter since January 2015 – as defined by the low-high range using daily data – for most major nominal effective exchange rates (NEERs). These include developed and EM currencies, as well as commodity and non-commodity currencies. Among G7 currencies, the euro NEER has been particularly stable in a 2.1% range.

The picture is also one of relative calm in emerging markets, with the pick-up in foreign capital inflows in April and June and in commodity prices since March helping to stabilise EM currencies without central banks having to draw on still significant FX reserves.

Commodity prices, including crude oil, have risen sharply so far in Q2 but their volatility has remained in line with historical standards, particularly in recent weeks. This has contributed to greater stability in commodity currencies, with the exception of the Australian dollar.

If anything, this lack of directionality has forced financial market players to be light-footed and adopt short-term tactical strategies. The question now is whether this relative calm is here to stay or whether it augurs more violent corrections as was the case earlier this year.

The UK referendum on EU accession has the potential to be far more destabilising to financial markets than the BoJ’s policy meeting on 16 June and in particular the Fed’s meeting the day before. While UK markets would likely feel the brunt of a decision to leave the EU, the euro would also likely weaken and global equity markets conceivably sell off.

The Fed’s policy meeting on 27th July could also prove disruptive at a time of potentially reduced summer-liquidity. Read more

Sticking to forecasts: Fed summer hike, Dollar hat-trick still on the cards, Modestly weaker EM currencies, UK to stay in EU and Sterling to appreciate

The Federal Reserve’s minutes of its 27th April policy meeting released last week set the tone for a possible June or July rate hike. On balance, recent US and global data are unlikely to have fundamentally changed the Federal Reserve’s view that a summer hike may be appropriate.

This is in line with my long-held forecast that the Federal Reserve would likely hike once or twice this year, with the first hike in June. I recently updated my forecast to a July hike as it gives the Fed more time to assess US and global data and the result of the UK referendum on 23rd June. The risk is that the very threat of a hike derails financial markets sufficiently for the Federal Reserve to postpone its second-hike-in-a-decade to later this year. Read more

State of Play – When less is more

Central banks’ tinkering with monetary policy and frequent u-turns are seemingly doing more harm than good. The Fed and the Bank of England have provided little clear forward guidance and the Bank of Japan’s move into negative rates only had a passing positive impact. While safe-haven flows may continue to appreciate the yen, a less competitive currency is likely to ultimately weigh on the economy and in turn the yen. In contrast the Korean won looks reasonably attractive at these levels. Read more

What to expect in 2016 – same, same, but worse

Trading on Fear

It is clear that markets so far this year are trading on sentiment, more specifically fear, with hard-data playing second fiddle. Or more accurately, price action suggests that markets are focusing on disappointing December numbers (e.g. US ISM) or even reasonably uneventful data (Chinese manufacturing PMI) and ignoring strong data such as U.S non-farm payrolls, Chinese services PMI and exports (see Figure 1).  The hit-and-miss approach of Chinese policy-makers to stabilise equity markets (and ultimately growth) have done little to restore confidence. I nevertheless flag in Figure 37 some of the key data and events to focus on this year. Read more

Half-time: Pass Me the Smelling Salts

Few of the big questions being asking at end-2014 have been answered in a convincing way. The Greek saga rolls into its sixth painful month but may finally be coming to at least a temporary conclusion. I still think a copout (new loans in exchange for reform) is more likely than a full-blown bailout (another large debt reduction) or burnout (Greece defaults and leaves eurozone).

Read more

What to look out for and expect in 2015

2014 was a year of two halves, at the risk of sounding clichéd. It started well, with equities fuelled by low global interest rates and market volatility. It then turned sour mid-year. Talk of US policy tightening and concerns about global growth’s underpinnings – exaggerated in my view – allied to mounting geopolitical tensions in Russia and the Middle East led to far more volatile markets (The global growth story – cause for concern, not panic). Equities and oil prices collapsed although the former has staged a late-year rally. Read more

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