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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China interest rates down?

  • Interest rates being cut as central bank tries to boost growth (3rd cut in 6 months).
  • Rates expected to continue lower this year.
  • Growth slowing as China economy makes inevitable move from export-led smokestack industries to domestic-demand-led (consumption & services).
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Structural shift in global economic system?

  • After WW2, US established Bretton Woods Institutions (IMF & World Bank) - by doing so it underwrote, and hence set the tone for the global economic system (post Cold War known as "Washington Consensus").
  • Over the last few years, due to pressures from the right, the US refused to give developing countries a bigger say in these institutions.
  • China has therefore set up rival institutions, and recently managed to get US allies to join - represents comprehensive failure of US strategy & tactics of global economic policy.
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Macrosnap of the big one?

  • The biggest single structural issue in global financial markets for 2015 is the timing of the US Fed rate rise - a fundamental driver of where the global savings that swish around the planet are parked.
  • As the US is poised to tighten monetary policy (interest rates up) and most other major countries are loosening or neutral, the US$ has soared.
  • The health of the US job market is the key determinant of timing - 1Q15 was looking strong so markets expected rate rise in June, but recent job market numbers weaker - for dinner party kudos, fine to suggest it will happen between June and Aug :)
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