Interest Rates
US: Markets are braced for more volatility with the Federal Reserve’s pivotal decision on whether to raise interest rates for the first time in nine years. America’s central bankers meet on Wednesday to debate whether to bring down the curtain on six years of near-zero interest rates.Even a small move would send a powerful signal to global markets that the era of cheap money is at an end. Markets think the chance of a rise is less than 30%, but many economists think it is higher.
UK: China’s recent turmoil has not altered the Bank of England’s plans to raise interest rates but most economists believe that the Bank will not raise rates until mid-2016. Again there is a Central Bank desire to ‘normalise interest rates’ i.e. bring them more into line with an historic average reflecting a growing normalised economy. The risk is, if they keep interest rates too low for too long, this will continue to foster a climate of ‘cheap money’ and fuel financial asset price ‘booms’, and consequent ‘busts’, in the future. Minutes of the Monetary Policy Committee’s September meeting showed they voted 8-1 to keep interest rates at a record low of 0.5pc.
Europe: The European Central Bank (ECB), on the other hand, looks like it will further ease monetary policy, if required, to support Europe’s economic recovery which remains extremely fragile.
Equities
Equity markets remain very volatile and are approximately 15% down from 12 month highs in Europe and circa 10% in the US. A slowing Chinese economy, dragging down world growth, has been the dominant factor behind this move but also compounded by US interest rate uncertainty. Greece, of course, has been a further negative factor for European equity markets.
Foreign Exchange
The trade-weighted US dollar index is still rising and is at its highest level since 2003 helped by the prospect of higher US interest rates .The strong dollar puts pressure on US manufacturers / exporters. Emerging Markets countries, who are natural exporters of commodities, have seen their currencies e.g. Russia, Brazil, Mexico, fall between 20% and 50% against the US dollar over the last 12 months: These are dramatic moves.
Emerging Markets
Brazil’s currency has plummeted to an all-time low and borrowing costs have tightened viciously after Standard & Poors slashed the country’s debt to junk status.It is the second of the big Emerging Market economies to be stripped of its investment grade rating this year after Russia had a similar fate in January.The Brazilian stock market was down 7.5% initially and this downgrade will put further pressure on Emerging Markets as a whole . Furthermore, Emerging Markets having accumulated USD 7.5 trillion of external debut and are acutely vulnerable to a rapid rise in US interest rates and a strengthening US Dollar making that debt harder to service and repay. According to Capital Economics’ estimate, as much as USD 120 Billion left EM investment funds in August.
Commodities
Oil: Current crude oil prices, at under USD 50 per barrel, remain painful for US producers particularly, as OPEC continues to freely supply the market aiming to eliminate US competitors who have higher production costs than OPEC members. Oil prices remain extremely subdued on the combination of lower demand, principally from China, and such over-supply led by Saudi Arabia.
Equities
S&P 500: 1958
Nasdaq: 4810
Bonds – 10 Year Government Yields
US 2.15%
EU 0.65%
GB 1.80%
Foreign Exchange
USD/EUR 1.1300 (1 euro buys 1.1300 dollars)
GBP/USD 1.5400 (1 pound buys 1.5400 dollars)
Commodities
OIL: Brent: 48.00 (dollars per barrel)
GOLD: 1100 (dollars per ounce)
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Regards
Paul McCormick
