Category: Markets

Why is a US interest rate rise such a big deal?

  • Interest rates (a key tool of monetary policy) are a fundamental driver of where the global savings that swish around the planet are parked.
  • Industrial world interest rates have been zero or close to zero for a while now - the US will be the first to raise rates.
  • So already have seen a global move towards buying US$ assets, hence US$ stronger - a rate rise will reinforce this trend.
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Macrosnap Saudi oil strategy?

  • Oil price has more than halved in the last year, so as OPEC cartel leader, one would expect Saudi Arabia to cut output (and hence force the price up).
  • But instead they have chosen to maintain supply, despite the financial pain this is causing domestically.
  • Strategy is to prioritise its own long-term market share, and perhaps to inflict pain on fellow OPEC members Iran and Russia (who Saudi Arabia believes have destructive geopolitical ambitions in the Middle East).
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Macrosnap of global monetary policy trends?

  • China growth slow: Central bank loosening.
  • Euro area growth looking dodgy: ECB considering further loosening.
  • US growth outlook uncertain: US seemed poised to tighten, but now might not seem so wise.
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Snapshot of QE in Europe?

  • In very crude terms, when an economy slows, a central bank can try boost growth by lowering interest rates or by Quantitative Easing (QE), injecting cash (liquidity) into the economy (by buying bonds from the marketplace).
  • With interest rates super-low (and some even -ve), the ECB launched a massive QE programme in Jan '15, which involved buying EUR1.1tn of bonds from the marketplace, which is the same as a EUR1.1tn cash injection into the economy.
  • But China slowdown and uncertainty in emerging markets have created new growth concerns, so ECB considering expanding the QE program (next meeting in early December).
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What is Monetary Policy?

  • Process by which the monetary authority (Central Bank) of a country or currency area, controls the supply of money.
  • The Central Bank usually targets an inflation rate or interest rate to maintain price stability and ensure trust in its currency.
  • Expansionary monetary policy is a recession-fighting tool, usually meaning increasing money supply faster than usual, typically by lowering interest rates.
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When will Fed rate rise occur?

  • Two thirds of economists polled by FT expect it to happen in December.
  • Markets expect it to happen in 1Q16.
  • Unusually hard call to make as US growth data sending mixed messages amid noise created by strong $ and financial market volatility.
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Oil price up again?

  • Has rebounded approx. 40% year-to-date.
  • So has reversed just under a third of the 2014 fall.
  • Expected that recent rise will run out of steam as US shale industry is rebounding strongly.
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