BOE and FED say things are starting to pick up
The markets began the week quietly but things picked up on Wednesday, with a significant amount of news from some big central banks around the world.
This gave market participants, in particular currency traders, plenty to trade on. The Bank of England (BOE) and the US Federal Reserve were the key names. Decisions taken by the Fed were as expected, but markets were more interested in the accompanying statement.
In the BOE minutes, it emerged that the bank came to a unanimous decision on their quantitative easing (QE) program, opting to keep asset purchases at £175 billion. Late in the evening the Fed made its announcement on interest rates and released a statement.
It transpired that the Fed members decided to keep rates between 0%-0.25% for an "extended period", and committed to fulfil their $1.25 trillion purchase of mortgage backed securities, albeit at a slower pace than intended.
At the last meeting the Fed said that "economic activity is levelling out", while this time it noted that "economic activity has picked up". This is a strong sentiment shift for an organisation that is an expert in moderating its tone. The Fed mentioned the improvement in the housing market, and that decline in fixed investment and employment was falling at a slower pace. The first reaction in equity markets was a flurry of buying, but this dissipated and one hour later the Dow Jones was trading 165 points off its high.
This week's flood of central bank commentary has created a lot of trading opportunities on the currency markets. A notable mover was sterling which weakened against every major cross.
On Thursday, BOE governor Mervyn King said that sterling's fall was helpful in rebalancing the economy to be focused on exports, and would "help to reduce the trade deficit". We saw a 200 point fall against the US dollar bring cable down to $1.62, and euro/sterling to a five month low above £0.91. The euro/US dollar hit fresh yearly highs last week and traded above $1.48 at times.
Debt is a major problem facing policy makers. The IMF estimates that G20 debt will hit 82.1% of GDP next year, which equates to roughly $37trn, 20% more than two years ago. Higher taxes and spending cuts look inevitable as government try to claw back cash. This does not make for a rosy outlook for business in the longer term.
If you are investing in this market you need to decide where you think we are headed. Have we overcome the downturn and are in the early stages of a bull market? Is the downturn over, but sustained growth a long way off and we are going to have fairly flat market trend in the coming years? Are you a short term trader who won't get exposed to a longer term move? Or do you believe, like we do, that we are still in a bear market similar to the great depression – just a more protracted one?
Whatever camp you are in, it is important to try and track the trend and be flexible in your view...
Oil prices fall as volatility returns
TRADING this week has been choppy. In particular, the oil market has been volatile with big swings in both directions. The bears seem to be winning the battle as prices are down 4.65% at the time of writing.
On Monday, renewed fears of faltering economic growth was prevalent in the market place. This was reflected by weaker equities, a strong dollar and falling oil prices.
However, the equity market has been resilient to dips in prices in the past few weeks, and this was the case again on Tuesday. This bullish equity sentiment led oil prices higher as it recovered most of Monday's losses. As ever Wednesday proved to be the biggest day for the Oil market with the weekly Oil inventories released.
The data showed an oversupply within the energy complex which sent prices tumbling almost $2 in 10 minutes. Typically after the weekly inventories we see a significant retracement to the knee jerk reaction to the data. But this week it failed to materialise as prices struggled to recover, despite equity prices moving higher and the dollar remaining fairly weak until after the FOMC announcement.
The way the Oil market has traded this week leaves us bearish. The charts are indicating that the up-trend from March is breaking down. For us, though, the level at $67/bbl remains the key. A breakthrough of this level should see prices fall to $63 with $65 providing brief support along the way.
Written by Paddy Haran & Vinay Sharma