- Markets give a 70% probability to a 0.25% interest rate (‘Fed Funds’) rise at the December Federal Open Markets Committee (FOMC) meeting.
- They will not take any action on the November 1st/2nd meeting as such action would be too destabilising with the US elections on November 8th.
- Markets have generally become quite relaxed about the elections as they are confident the ‘no change’ candidate Hilary Clinton will beat Donald Trump.
- A mood of caution takes hold across the continent ahead of the ECB policy meeting this week.
- As Sterling fell (post-Brexit from GBP/USD 1.50 to GBP/USD 1.25 ) the FTSE 100 index rose from 6000 to almost a record high above 7,100 as FTSE 100 global conglomerates e.g. Shell, BP, BHP Billiton, GlaxoSmithKline are able to convert their significant overseas earnings back into the UK at a much lower exchange rare resulting in greater Sterling profits. However, as Sterling has fallen further to GBP/USD 1.22 the FTSE 100 has instead weakened as the market becomes more concerned about the inflationary impact of a lower exchange rate (the UK imports many goods including foodstuffs).Higher inflation normally results in higher interest rates and a poor environment for corporates.
- The FTSE 100 has also not been helped by fears over a ‘hard Brexit’ with questionable trading ties with our European partners
- Furthermore, as the Bank of England cut interest rates post-Brexit and announced further Quantitative Easing, UK Government Bond (GILT) prices rose sharply / yields fell. The yield on the 30 year maturity GILT fell to 1.40 yield-to-maturity. However, like the FTSE 100 reversal, 30 year yields have now risen to 1.70 (a big fall in prices) as inflation concerns, and potentially higher interest rates, look quite likely looking ahead to the future. Higher interest rates are bad for current low bond yields!
- All quiet. Oil has settled around $50 per barrel. Gold at $1250 per ounce.Gold will perform poorly if US interest rates continue to rise in 2017 as it is a non-interest bearing asset. Gold does well in times of war and financial crisis!
Investment Bank Third Quarter 2016 Earnings:
Bank’s have just starting to release their earnings over last week or so and results are positive.
- Goldman Sachs achieved its first double-digit return on equity of the past six quarters, as brighter capital market conditions allowed the Wall Street bank to benefit from the shake-out of weaker competitors, particularly currently weaker European banks. Generally US banks have re-capitalised and re-structured much better than European banks since the financial crisis, growing their asset management arms particularly. The bank’s third-quarter net income rose 58% to $2.1 billion due to a pick-up in bond trading, rising equity markets and a drop in the Vix index, often known as the “fear gauge”.
- Bank of America similarly beat earnings for the third quarter boosted by trading revenues
S&P 500: 2100
FTSE 100: 7000
Bonds – 10 Year Government Yields
EUR/USD 1.1000 (1 euro buys 1.1000 dollars)
GBP/USD 1.2200 (1 pound buys 1.2200 dollars)
OIL: Brent: 50.00 (dollars per barrel)
GOLD: 1250 (dollars per ounce)
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