Bank Of England Dominates Headlines: Analysts and market participants will be listening closely as Carney discusses both the BoE Inflation Report, and the overall monetary policy statement. This will be the final BoE press conference/rate announcement before the referendum in early June. Dollar Consolidates While Markets Hold Their Highs: the greenback looks like it’s set to strengthen a bit more against most currencies, so we could get a bigger move down in gold and oil, along with a bit of a sell off in emerging markets…
Bank Of England Dominates Headlines
12.05.2016 The only data in both European and American markets today worth noting is of course the Bank of England’s rate announcement, which will begin at midday (British Standard Time). Although we shouldn’t expect any actual changes in policy, or the vote count at that, we could see some volatility across sterling currency pairs, the FTSE and of course Gilts. Analysts and market participants will be listening closely as Carney discusses both the BoE Inflation Report, and the overall monetary policy statement. This will be the final BoE press conference/rate announcement before the referendum in early June, that will decide whether the UK remains in the E.U or not. Topics that will no doubt be discussed include; the overall inflation expectations of the BoE, the employment situation, the Fed’s potential to hike rates next month and of course the referendum itself and the Bank of England’s expected reaction to the very likely scenario that the UK will no longer be under E.U law. To be frank, I personally think Carney will try to insert a bit of optimism back into markets, which may indeed lift sterling against both the dollar and the Euro. However, he could go down the road of being honest, stating that a hike in interest rates is far away, due to both poor inflation and the recent poor economic growth figures. What ever happens, expect volatility and be careful if you’re exposed to any sterling pairs, Gilts or the British stocks.
Dollar Consolidates While Markets Hold Their Highs
11.05.2016 As always, the second week of the month is there to absorb the abundance of data released in the first. So this week we’ve just seen consolidation across most currency pairs so far, with the stock markets rallying slightly off support hit last week. I wouldn’t expect too much different over the coming days to be honest. Maybe another test of the 2100 area in the S&P 500 could be on the cards, but this will depend on there being no unintended bearish news released. Moreover, the greenback looks like it’s set to strengthen a bit more against most currencies, so we could get a bigger move down in gold and oil, along with a bit of a sell off in emerging markets. The question waining on the minds of many macroeconomic analysts now is whether this dollar strength is a continuation of the over arching Obama Dollar Rally, or just simply a pull back within the commodity/emerging market rally we saw over the last few weeks. No doubt these questions will all be answered at the next Fed meeting in June, so for now expect more of the same; choppy action, uncertainty and consolidation.
Oil Gaps; Saudi Changes Minister
09.05.2016 The opening gap in oil this morning, was a reply to the replacement of the 81 year old Saudi Arabian Oil Minister, Ali al-Naimi. The former head of Aramco (Saudi Arabian Oil Co), the state owned oil company, Khalid al-Falih, will be taking his position. While this move has been anticipated by oil analysts for quite some time, the fact that al-Falih doesn’t have the OPEC experience or relationships that al-Naimi had gives off an aura of uncertainty surrounding the overall direction of Saudi Arabia’s oil policies. Adding another spanner in the works is the fact that al-Falih is a key ally of Deputy Crown Prince, Mohammed bin Salman. The anticipation is that bin Salman will now take further control over the setting of Oil supply policy. With bin Salman essentially having the overruling no vote on Saudi Arabia’s refusal to limit global oil supply, this appointment means we’re incredibly unlikely to see any sort of deal limiting supply anytime soon. So why do the Saudis refuse to cut back on supply, ultimately increasing prices…?
The question of why Saudi Arabia is willing to essentially hurt itself economically by refusing to vote on a supply cut to increase prices (and therefore their bottom line), is a question that comes up a lot. If you are an economy reliant on Oil exports and you had a controlling vote which would have a positive effect on price, then surely the common sense thing would be to use it? But Saudi Arabian policy led by bin Salman takes a different, longer term view. With a new frontier of oil production coming in the form of US shale producers, the settled OPEC ‘old guard’ led by Saudi Arabia, is now fiercely embroiled in a price war with the US shale industry. The cost of shale production is much higher, so lower prices make their main rival uneconomical. The second side to this underground price war is the re-emergence of regional, political and economic rival Iran onto the world stage. After global sanctions were lifted, Iran has made it clear that their goal is to ramp up production and try to take a share of years of missed revenues while they have been left out of the loop. Saudi Arabia’s view is therefore, why would they want to limit their own supply and share of profits while Iran simply takes over?
There is one more side to Saudi Arabia’s refusal to limit supply, and that is purely politically motivated. Prince bin Salman is leading a push to make Saudi Arabia less dependent on oil revenues. He has overseen the sale of part of Aramco in an attempt to diversify the country’s revenue stream into non-oil assets. So from a political viewpoint, lower oil prices actually make his political argument at home stronger. So why has Oil rallied? Uncertainty! With price already bouncing from technical lows on the WTI daily chart, this political change screams unpredictability and that is why the market has jumped in the short term. Something else to keep in mind is the wildfires burning through the Canadian Oil Sands region. The actual length of supply limitations that this fire could cause is still yet to be seen, but where there’s smoke… You should know by now that markets aren’t completely rational things. They try to predict the future when you think they probably shouldn’t and then don’t when you think they probably should. As a trader, you need to come to terms with the fact that your opinion does not matter. The only thing that matters is price.
What Could Happen At Today’s NFP Announcement…?
6.05.2016 Markets are all holding tight, keen to see what the April job figures for the US economy are. NFP is expected above 200k and the unemployment rate is forecast to remain steady at 5.0%. More importantly however is the wage inflation figures, which come out in the form of Average Hourly Earnings; this is expected to be 0.3%. Currently the increase in the US jobs market has been highly criticised by economists and analysts all around the world. The current ‘booming US jobs market’ is predominantly driven by low wage paying jobs. Although this can be interpreted as good, as more people that were not employed are becoming employed, it is a trend we saw right before 2008 and 2000. These are the first jobs to go in a recession and actually bring down the overall wage figures across the US. It’s easy enough to create poorly paid jobs, however, at the backbone of the US economy is of course the educated middle class. Jobs that require college graduates and specific expertise are what makes an economy grow. By creating and focusing on these jobs, the lesser paid jobs follow.
For now though, the figures are seemingly okay, according to the markets, and this afternoon we can expect three scenarios: Scenario 1 – We get a rager. All the employment figures are good, with NP punching above 250k. In this scenario we can expect gains of around 100 pips or more of the greenback against most majors. The S&P 500 may in fact come off if this happens, due to the fact that it will increase expectations of a Fed rate hike in June. The optimism should however hold it from collapsing, so it will probably be a choppy market to trade and could well rebound. Scenario 2 – We get a pooper. All or most of the employment figures fail to meet expectations, with NFP dropping to below 170k. In my opinion the markets are pricing in a similar situation at the moment to this. Sentiment seems to be for a poor number, so if we get it, depending on how bad it actually is, we should only see a brief decline in the dollar against the majors. The stock market may rally if this happens, as the US will be expected to hold tight at the June meeting, maintaining the low 0.5% current rates. Scenario 3 – Figures are all thereabouts in-line. This may actually cause the dollar rally and stock market decline to continue. In this scenario we can expect a bit of bullishness across the board, but probably not as much as in scenario 1.
