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Macroeconomic Outlook and Recap: 16/09/19

The breaking news Saturday, which is still developing at the time of writing, came from the Middle East, with two Saudi Arabian oil plants critical to the oil industry attacked. This could potentially disrupt over half of the Kingdom’s oil output. The supply cut is expected to see oil prices surge when markets open on Monday. Furthermore, although the attacks appeared to originate in Yemen, the US has blamed Iraq, increasing already heightened tensions in the Middle East. 

In recent commentaries, we have spotlighted a more optimistic theme for global financial markets with an ongoing move to a “risk-on” environment from late August into September. This continued last week as trade pressures between China and the US continued to ease, in fact with positive developments signalling a more constructive background to the restarting of trade talks in October.

The delay by the US of upcoming tariffs on $250 billion of goods from the start of October until 15th October came alongside China’s announcement that farm products (like pork and soybeans) would be added to16 types of goods already exempt from tariffs for a year. 

Also, an interim trade deal could be in the offing with the US indicating willingness to explore such a deal. The combination of these factors positive developments have bolstered an already more positive tone for the global economy across financial markets with stocks higher globally, bonds lower and “risk currencies” rallying, whilst the safe haven Japanese Yen has sold off.

Last week’s European Central Bank Meeting on Thursday was much anticipated and the ECB delivered the deposit rate cut from -0.4% to -0.5% that financial markets were looking for. The ECB also introduced a tiering system whereby negative rates would not be applicable to a significant proportion of deposits held at the ECB by commercial banks. The potential outcome of this tiering is that liquidity could end up being drained from the banking system (with banks deposit money at the ECB for 0.0%).

A further ECB policy development was the start of another a new round of Quantitative Easing (QE), which is the purchasing of government bonds to facilitate a quicker transmission of lower interest rates into the European economy. The impact in the markets of the ECB changes were for Bond markets to significantly sell-off (to higher yields) and a stronger Euro. European and global stock averages seemed to benefit from the easier monetary policy, with markets attaining new September recovery highs into the end of last week.

The Brexit saga continues to dominate the UK financial markets even after the passing of the law to avoid a “no-deal” Brexit at the end of October and the proroguing of Parliament from Tuesday. The end of last week saw the Scottish Courts ruling that the proroguing of Parliament was unlawful, and this will now be reviewed by the UK Supreme Court this coming week. In addition, the prospect of progress on the Irish backstop pushed Sterling higher into the weekend.          

What to Watch

Further developments around the trade war/ talks will as ever need to be monitored, whilst the situation in Saudi Arabia and across the Middle East will doubtless grab headlines to start the week.

This week also sees three major global Central Banks in play with the US Federal Reserve meeting on Wednesday, then Thursday sees the Bank of Japan & Bank of England Meetings and Press Conferences.

 

Economic data
16th September Chinese Industrial Production and Retail Sales
17th September RBA Meeting Minutes; German ZEW; US Industrial Production
18th September UK, Eurozone and Canadian inflation reports (including CPI); Federal Reserve Meeting/ interest rate decision
19th September Australian Employment; Bank of Japan Meeting/interest rate decision; UK Retail Sales; Bank of England Meeting/interest rate decision
20th September German PPI; Federal Reserve’s Rosengren speaks

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