OANDA Market Insights podcast (episode 36)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: PM faces Brexit transition backlash, Trump shifts tone on Saudi crisis, UK inflation lower than expected, China growth lowest since financial crisis.


Fed minutes rattle investors

Market sensitivity to Fed hikes evident again after minutes

We’re seeing mixed trading in Europe so far on Thursday, following a less than impression in Asia overnight – particularly in China – while US futures are pointing to further losses on Wall Street which saw some late weakness on Wednesday.

The Fed minutes caused further unrest on Wednesday, as they reaffirmed the widely held opinion at the central bank that interest rates have further to rise including another hike this year. Why this came as such a surprise is something of a mystery as the minutes didn’t appear to deviate from the message after the meeting when the central bank raised interest rates and removed the reference to policy being accommodative.

This may instead be a reflection of the fragility of financial markets right now and sensitivity to higher interest rates which appeared to be behind the recent sell-off. In many ways, the minutes are outdated as they don’t take into consideration the current unstable market environment which, if it persists, may encourage policy makers to take their foot off the gas a little. One thing is clear, the minutes will not make Trump happy after a series of public attacks against the Fed for raising rates in a manner that undermines his growth goals.

DAX edges higher as German inflation creeps higher

May risks wrath of Brexiteers after Brussels visit

It’s not been a great 24 hours for the UK, with Theresa May’s speech in Brussels – which she hoped would end the impasse between the two sides – creating more uncertainty, as the proposed emergency November summit was seemingly abandoned and the discussion switched from a deal later this year to a potential extension of the transition by “a matter of months”. This is likely to infuriate the Brexiteers within the Conservative government, if it turns out to be accurate, and could accelerate her removal as Prime Minister.

GBPUSD Daily Chart

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May’s position is already hanging by a thread and if reports are true that four more letters would trigger a vote of no confidence, then her days may well be numbered. That said, there’s nothing to say there’d be enough votes in parliament to remove May which may explain why they’ve instead chosen to berate her plans from the periphery for months, rather than replace her with a Brexiteer that can work towards the Canada+++ deal they seem to favour. It’s this that may explain why the pound hasn’t fallen too far on the reports, with an extended transition maybe even being seen by some as beneficial as it keeps the UK tied to the EU for longer and reduces the possibility of a no deal Brexit.

Aussie gains as unemployment hits 6-1/2 year low

Decline in UK retail sales expected after bumper summer

The bad news for the UK was compounded this morning by data showing consumer spending in September slipped even more than expected, with retail sales falling by 0.8% compared to August. It’s worth noting that the weaker showing in September is probably more a reflection of the bumper summer the UK has just experienced, with good weather and World Cup fever encouraging the public to loosen the purse strings a little.

UK Retail Sales (YoY)

This was never likely to last in such a challenging environment for the consumer, with real wages having spent most of the last 18 months falling as the post-Brexit referendum sell-off in the pound pushed inflation above earnings growth. These things tend to even themselves out so a slowdown in spending in the run up to what is typically an expensive time of year for the consumer doesn’t come as a surprise.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Fed minutes eyed as markets recover

Fed minutes in focus as markets rebound following sell-off

US futures are trading slightly in the red on Wednesday, paring gains from the previous day as risk appetite continues to improve.

A decent rebound in the US on Tuesday on the back of strong earnings numbers has gone some way to allaying fears about last week’s sell-off. The results are a timely reminder about the strength of the US economy right now and despite the large amount of underlying risk that still exists, investors have plenty to be optimistic about.

Considering the fact that a major contributor to the sell-off appeared to be rising US bond yields – which have come off as risk appetite has returned – today’s FOMC minutes should be very interesting. Given the events of the last couple of weeks, there is a chance that the minutes are a little outdated, but that won’t stop people pouring over them for clues about where exactly we are in the tightening cycle and how much further there is to go.

Little hope for Brexit breakthrough at EU summit

Powell was a primary catalyst for the spike in yields a couple of weeks ago when he declared that we’re not yet near the neutral rate and could go beyond, which flies in the face of the belief of many that we’re in the latter phase of the tightening cycle. It will be interesting to see whether others share the views of Powell, although we may be better informed by the comments of the many policy makers that are speaking this week, including Lael Brainard today.

May heads to Brussels as patience wears thin on both sides

For the UK, this week may be dominated by what’s happening in Brussels but the current state of the economy will also be a focal point for traders, with today’s CPI data being the second of three notable releases.

UK CPI Inflation

Inflationary pressures moderated once again in September after a brief summer spike that accompanied a surge in activity as consumers made the most of the good weather and the country’s unexpected World Cup success.

Dollar in holding pattern; Asian equities follow Wall Street

The return of grey skies and dark evenings has been a timely metaphor for the mood in Brussels right now, with good will wearing thin and the two camps becoming increasingly hostile towards each other despite only a small number of issues remaining. Theresa May heads to Brussels today in the hope of bridging the divide over these issues but any agreement this week is extremely unlikely with attention now switching to an emergency summit in November.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Little hope for Brexit breakthrough at EU summit

May heads to Brussels as no deal preparations continue

Risk appetite appears to be gradually returning to markets following strong earnings-driven gains in the US overnight as attention now shifts to Brussels were Brexit talks will continue.

All eyes in Europe will be on the EU summit over the next couple of days as Theresa May heads to Brussels to try and break the impasse on the Northern Ireland border and the backstop arrangement. As the pressure has increased and the deadline neared, relations appear to have deteriorated rather than improved which has been worry but I still believe a deal will come, just not this month.

The EU has become renowned for its 11th hour deal making and I expect these negotiations to proceed in much the same way. For me, it’s the prospect of a deal not getting through parliament that represents the greatest risk rather than the leaders of the 28 deciding to suddenly abandon talks and shoot themselves in the foot in the process. We will hopefully be a lot clearer on the prospects of a deal by the end of the week.

Dollar in holding pattern; Asian equities follow Wall Street

Oil stable for now as Trump seeks to diffuse Saudi tensions

Oil prices appear to have stabilised a little in recent sessions after coming off their highs earlier in the month. Iranian sanctions have contributed strongly to the rise in oil prices in recent months but global growth concerns over the last week or two has clearly taken some of the heat out of the rally and at the very least, been the catalyst for some profit taking.

Brent Crude Daily Chart

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The disappearance of journalist Jamal Khashoggi threatened to heighten tensions between the US and Saudi Arabia, which immediately drew attention back to oil as many saw it as being a potential weapon against US sanctions. But this was short-lived, with Trump clearly going out of his way to diffuse the situation rather than take his usual more combative approach, in a clear sign of his lack of appetite for a confrontation with Riyadh.

Asia market update: Focus on Yuan

Trump increasingly frustrated with the Fed

Trump once again weighed in on the central bank on Tuesday, claiming it is his biggest threat and that he’s not happy with what it’s doing as the inflation numbers are very low. Trump has repeatedly tried to pile pressure on the central bank to slow its rate hikes while claiming to respect its independence so the latest attack comes as no surprise.

And while the dollar has often softened in response to his comments, I don’t yet see them as a real risk to the central bank’s independence and we’re yet to see any evidence that it’s having any impact whatsoever on policy making. In fact, it’s simply another attempt by Trump to lay the groundwork for future finger pointing in the event that the economy falters, just as he did at the first sign of weakness last week.

The Fed minutes will likely highlight the Fed’s determination to plough on later on today, with the central bank having previously alluded to one more hike this year and a few more next. Given everything that’s happened since the meeting though, I wonder whether the minutes are already outdated and in fact, the comments we’ll get over the course of this week – including from Lael Brainard today – will be more relevant.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Live FX Market Analysis – 16 October 2018 (Video)

It’s been another turbulent week in FX markets with last week’s sell-off suitably spooking investors, Saudi Arabia causing a stir following allegations of murder at its embassy in Turkey, Brexit talks stalling and Italy risking the wrath of the European Commission after submitting its budget. Senior Market Analyst Craig Erlam discusses all of these and more in this week’s webinar.

Craig also gives his live analysis on EURUSD (16:37), GBPUSD (18:09), EURGBP (20:05), AUDUSD (21:56), USDCAD (24:25), GBPCAD (29:37), NZDUSD (30:14), USDJPY (31:05), GBPJPY (31:50) and EURJPY (32:40).

Markets stable for now but risks pile up

Saudi in the spotlight as lies start to unravel

Investors may not be feeling particularly comfortable yet but we are seeing some welcome stability in the markets on Tuesday, with Europe posting small gains following a mixed session in Asia overnight. US futures are also pointing a little higher which will provide some comfort following a number of rather explosive sessions.

As ever, politics is driving everything right now and while a trade spat between the US and China has gone quiet, it’s been Saudi Arabia in the spotlight following the disappearance and alleged murder of journalist Jamal Khashoggi. Brexit is never far from the headlines as the UK and EU continue efforts to resolving the Northern Ireland backstop – without much success – while Italy offers another headache from within after it submitted its first populist budget that put it on a collision course with Brussels as it breaks its fiscal rules.

The buck cannot find a bid

Oil eases as Trump takes heat out of situation

Oil prices have continued to edge lower on Tuesday, as Trump appeared to take some of the heat out of the Saudi situation following a phone call with King Salman. Trump appeared reassured by the conversation after the King denied any knowledge of what happened, which suggests he’ll be in no rush to impose sanctions or other measures against the country.

WTI and Brent Crude Daily Charts

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While it later emerged that Saudi Arabia was willing to admit that Khashoggi was unintentionally killed during an interrogation, having previously claimed he left via the back door, traders don’t appear to believe that this will influence Trump’s response to the situation with the American President clearly very reluctant to enter into a tit-for-tat with a key middle eastern ally.

Saudi Arabia has a number of options at its disposal for responding to US sanctions, including causing severe disruption in the oil market if it suddenly reduced output in what is already a tight market. Prices have already risen to levels not seen in four years and if the Saudi’s decide to use this as a weapon, it could cause prices to soar which would be very damaging for the global economy. There is a hope that the self-harming nature of such a move would deter such action.

Commodities Weekly: Gold at 2-1/2 month high as safe haven status reborn

UK wage growth accelerates in August

The UK labour market data this morning provided some positive news among the constant flow of tedious rhetoric regarding to the stalled Brexit negotiations. Despite the low growth environment the country finds itself in due to the uncertainty around the negotiations, unemployment remained at a 43-year low in August while wage growth exceeded expectations, rising 2.7% or 3.1% when bonuses are stripped out.

UK Real Wage Growth

Source - Thomson Reuters Eikon

Real wage growth has been among the greatest casualties so far of the referendum result, having fallen in large part due to the currency impact on inflation. While we have edged back into positive territory this year, the increases are tiny which makes even a small beat today something to celebrate. The pound rallied following the data, breaking 1.32 against the dollar before paring gains.

GBPUSD Daily Chart

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Risk aversion remains at the start of the week

Could strong retail sales report prompt more selling?

Markets remain in risk aversion mode at the start of the week, with losses being recorded across Asia and Europe and US futures pointing to a similar session on Wall Street.

While the losses being reported are more modest that those seen last week, which investors will hope represents some stability and normality returning to markets, it will remain a source of concern for now. Underlying risks in the markets remain plentiful, from Sino-US trade to Brexit, Italy’s budget spat and now German political concerns following state elections in Bavaria.

While investors will primarily be focused on the numerous political stories and related risks, US earnings season which kicked off on Friday will provide a welcome distraction over the coming weeks. We’ll also get US retail sales data on Monday which will be followed closely given investor anxiety about the prospect of higher interest rates and the pace that US yields are rising in anticipation of this. In these unsettled markets, a strong reading could actually have a negative impact if it prompts a further selling of Treasuries and another rise in yields.

Pound suffers on Brexit stalemate

Brexit talks heading for 11th hour fudge as crunch talks fail

Crunch talks in Brussels over the weekend lasting only an hour failed to produce a deal on the Northern Ireland border backstop that remains the main blocker to an agreement between the UK and EU. It was hoped that a compromise could be found ahead of the EU summit later this week but it’s looking increasingly like being an eleventh hour fudge, which won’t surprise anyone who’s followed these talks for the last year and a half.

The pound is holding up relatively well despite the stalled progress over the weekend. The currency is likely to remain rather volatile over the coming weeks as talks continue and we see increasing amounts of commentary being leaked, not to mention more pressure on the May following reports that more letters of no confidence being submitted, taking the total number to 44, four short of the number required to trigger a vote.

Asia Market Update: echoes of October past

Oil breaks with last week’s trend on Saudi fears

Oil is trading higher at the start of the week, breaking with the trend towards the back end of last of being dragged lower along with overall risk appetite on growth concerns, following an heating up in rhetoric from the US and others towards Saudi Arabia over the weekend after the disappearance of journalist Jamal Khashoggi.

Saudi Arabia denies behind the disappearance and alleged murder and vowed to retaliate to any sanctions or pressure from other countries. This makes oil traders very nervous given that Saudi Arabia is among the world’s largest producers and could use this as a tool against other governments, at a time when prices are already inflated and rising due to tighter supply on the back of years or coordinated cuts and more recently, Iranian sanctions.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

OANDA Market Insights podcast (episode 35)

OANDA Senior Market Analyst Craig Erlam review the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Global market sell off, IMF warns Italy, Chancellor optimistic on Brexit, Crude slumps on market uncertainty.

European Open – Markets pare losses into week end

Stocks pare losses as we head into the weekend

Investors look set for a day of reprieve on Friday, as futures and Asian trade overnight suggest we’re not on course for a third day of a selling frenzy.

Stock markets in Asia overnight have rebounded fairly well, with indices posting decent gains, although this does little to change the narrative of the week which has been quite brutal for investors. While everyone has been desperately trying to explain what the catalyst for the sudden and sharp sell-off was, the fact is that there is clearly underlying vulnerabilities and it didn’t take much for investors to flood for the exit.

Perhaps this is just a necessary and normal correction but the scale of the losses in such a short period of time are worrying. We may be seeing a paring of those losses heading into the weekend but that doesn’t give me any real confidence that markets won’t start next week in much the same manner as they’ve spent much of this.

Asia market update

Oil 1% higher as traders test the water following 8% decline from last week’s peak

Oil has been fully caught up in the frenzy over the last couple of days, with the sell-off possibly providing an ample opportunity for those that have profited from its more than 20% gains over the last couple of months alone, to lock in some profits. I don’t think it’s changed the view of many that oil could have further to run, rather they may see the last couple of days as being a blessing given the levels we’re now at.

Oil (WTI and Brent) Daily Charts

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Brent and WTI are around 1% higher on the day after falling around 8% from last week’s peak. Whether they can build on these gains will depend on how risk appetite holds up over the course of the day and, more importantly, on Monday once everyone has had an opportunity to absorb the events of this week and decide whether there’s any substance to the sell-off or it’s just a knee-jerk overreaction that presents opportunities.

Gold gains most in more than two years

China posts record trade surplus of $34.13 billion with the US in September

For all the talk of trade wars being easy to win, the trade data we’ve seen this morning suggests it may not be quite so straightforward. It would appear that when you throw a floating exchange rate into the mix – a sensitive issue in itself after the Treasury department found China not to be a currency manipulator, despite Trump’s constant claims to the contrary - the surplus country can be quite well shielded from tariffs while the deficit country will face quite the opposite reality.

This would appear to be particularly true when the deficit country’s economy is boiling hot and tax reforms mean the consumer has a few extra dollars in their pocket to throw around. While this trend isn’t expected to continue as the tariffs become increasingly harsh, more consumer goods are thrown into the mix and pre-emptive order flow passes, it will no doubt be infuriating Trump and pleasing those that oppose such measures.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

European open – Trump attacks Fed as markets tank

Bloodbath in Markets as Trump Points Finger at the Fed

European stocks are set to become the latest casualty in the global sell-off that has rattled markets over the last 24 hours, as investors worry about the potential for a sharper correction on the back of rising bond yields.

It’s been something of a bloodbath overnight, as investors saw what occurred in the US – despite there being no clear catalyst for such a move - and dashed for the exits as fears grow that global risks are mounting and the bill is coming due. While people are naturally pointing to the bond market to explain the sudden panic – most notably Trump who’s been laying the groundwork for blaming the Fed for the last couple of months – I wonder whether the underlying risk in the markets for some time has left market primed for a correction and investors have simply fled at the first sign of danger.

Trump was extremely quick to point the finger of blame at the central bank for raising rates too quickly, but as the CPI data is expected to show today, inflation is running above target despite its actions and the absence of more rate hikes could accelerate that. As is to be expected, Trump is not going to want to accept any responsibility himself for huge tax reforms that provided significant stimulus in an already hot economy, forcing the Fed to hike faster than they may have wanted, or for creating risk in the markets by starting a trade war with China, but that is what is playing out here.

There is the potential for this to be nothing more than a brief shock that markets quickly recover from but the proximity to the mid-term elections in the US could make it problematic for Trump if it turns into more. That more than likely explains why Trump has been laying the groundwork in recent months, in preparation for such a scenario so the seed of blame has already been planted, enabling him to quickly come out on the attack as he has.

Asia Market Update: Worst case scenarios abound

Oil traders lock in profits as sell-off takes hold

It’s not just equities that have suffered the wrath of the bond sell-off, oil bulls also appear to have been run over in the process, with Brent and WTI falling a few percent on Wednesday and extending those losses today. Oil has been scaling long-term highs in recent months and attracting a lot of attention as the US sanctions on Iran prepare to come into effect.

The sell-off on Wednesday and today has prompted some profit taking in oil markets, which should prove temporary as long as the broader sell-off doesn’t worsen too dramatically. It will be interesting to see how quickly traders look at the sell-off in oil and seize the opportunity to buy the dips in an asset that was widely seen as being very bullish only a week ago. Of course, if the recent selling is a sign of more worrying weeks and months to come then you would expect oil prices to suffer as well, particularly if the selling is preceding an anticipated slowdown in the global economy which naturally affects demand.

Pace of equities’ declines slows as Asia mulls Wall Street weakness

Bitcoin status as “gold 2.0” falters as cryptos caught up in selling

The sell-off also appears to have stretched to more exotic instruments, with bitcoin neither displaying the qualities one would expect of gold 2.0, as it has been touted as by some cryptocurrency enthusiasts, or simply escaping relatively unscathed as a new and relatively uncorrelated asset. This truly is a widespread sell-off and anything perceived as a risky asset has been in the firing line. What will be interesting is whether this will be enough to force bitcoin below $6,000 which has proven to be something of a floor for the crypto on numerous occasions this year.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.