There is a lot to absorb after this week’s market sensitive events.
It’s been a busy week on the central bank front. Aside from the Fed and the PBoC, many have stood pat (Norges, BoE, BoJ), but their tone and statements have changed a tad, which is supporting their own currencies.
The defeat in this week’s Dutch elections of anti-immigration candidate Geert Wilders is being seen as a blow to populist political leaders, easing concerns ahead of next months French Presidential election – the French/Bund spread has narrowed to its lowest level in sometime.
On Wednesday, the Fed hiked as expected, but the dollar has taken a beating, and is poised for its first monthly loss in a month, as investors re-price three rate hikes for 2017, rather that last weeks four.
The ECB’s Nowotny (Austria) has suggested that their strategy for tightening policy would be different from the Feds. The EUR (€1.0770) has seen a significant move higher, supported by the possibility that the ECB could start to raise rates before its QE program is complete.
Sterling (£1.2382) is consolidating its post-BoE Thursday spike as the decision mentioned ‘price pressures.’ This morning, the BoE’s sole dissenter, Kristin Forbes, has clarified his surprise call for a hike, noting a change to growth and inflation data suggest that rates should rise. Futures indicate that the next rate move is higher not lower, and are pricing in a +50% probability of a +25 bps rate increase in 2018. Before yesterday’s announcement, this figure stood at +30%.
The PBoC China’s central bank also raised borrowing costs this week, while the BoJ left its monetary policy setting unchanged. The PBoC’s +10bp increase in reverse repo and MLF (medium term lending facility) rates is part of policymakers deleveraging efforts in key sectors of the economy (steel, coal, non-ferrous metals, and real estate) and not a policy shift.
Global stocks are on course for the best week since January after the Fed hiked without accelerating their timetable for future hikes.
Commodities have found support from a weaker dollar. Yesterday, gold futures notched their biggest daily gain in 10-months, as dealers bet the Fed risks letting inflation perk up beyond its +2% desired target.
Crude oil has a record OPEC compliance cut and an IEA statement that H1 supplies would be depleted to support higher prices.
The U.S yield curve has flattened now that the U.S 10-year yield has plummeted to +2.53% away from the markets psychological ‘bear bond market’ swing point north of +2.60%.
On this Friday morning, despite market volatility retreating somewhat, investors are also weighing if the White House can make good on its fiscal stimulus plan of a new tax regime, business deregulation and infrastructure spending.
There is also the G20 Finance Minister meet in Germany today and tomorrow. Participants are expected to focus on avoiding protectionism and FX devaluations, is that possible? Could make for an interesting open to Australasian markets on Sunday.
