Words can move the global market. Nowhere is this truer than in the U.S, where the most newsworthy topic influencing investment markets continues to be whether or not the U.S Federal Reserve (the Fed) will hike interest rates. Solid economic performance this year placed the rate hike on the agenda early on; however the rhetoric lately has been convincing investors that Janet Yellen and the Fed will be raising rates at their December meeting in just over a fortnight.
Indeed, why shouldn’t they raise rates? Interest rate rises are used by central banks to increase the cost of borrowing, crimping economic growth and thereby (hopefully) managing inflationary pressures. In light of this, the U.S economy is moving at a healthy clip: employment is on the rise, with October data indicating that 271 000 jobs were added to non-farm payrolls – 90 000 more than expected by analysts. Furthermore, hourly wages are also accelerating, increasing 2.5% in October over the last year, up from 2.2% in September. It is this earnings inflation which feeds through to price inflation, and hence it is one of the many indicators which the Fed watches carefully.
However, the expectation of a rate rise has supported the U.S Dollar significantly, with the greenback advancing 4.94% against a basket of currencies. This may present an economic headwind to many of the large U.S corporations who export all over the world – their products keep getting more expensive to import. So, the U.S economy is in a bizarre situation where the very issue the Fed aims to fix, is being fixed by the mere threat of doing it.
The U.S Federal Reserve is not the only central bank with grand plans for December - the European Central Bank (the ECB) has been providing stimulus to the European market, in its bid to generate inflationary pressure (thereby avoiding the greater evil of deflation). The stimulus has come in the form of their very own “Quantitative Easing” programme and a slashing of interest rates. However the president of the ECB, Mario Draghi, stated that inflationary conditions were still far below target and that the economic recovery was the weakest since 1998. In light of this, he has recently provided forward guidance on further measures to stimulate activity in the Eurozone. His announcement prompted the Euro to drop further against the U.S Dollar and it will be interesting to see how low it can go. We believe the Euro can reach parity with the Dollar this month.
Among the most significant headwinds facing global economies has been the slowing growth rate in China’s economy. The Chinese Communist Party’s policy drive has been to change China from an export and investment-led economy toward a more private consumption and services sector-led one. The ripple effect of this rebalancing is being felt most in the commodities market, which has been hammered in the past year. To put the losses into perspective, the Bloomberg Commodity Index is at the same level it was in 1999, erasing 16 years of gains. Furthermore, the Chinese government has abandoned their infamous “one-child policy” in favour of a “two-child policy” in a bid to correct the top-heavy demographics of their society.
Further significant news this quarter has been the enduring migrant crisis in the Middle East. The huge number (an estimated 1 million) of migrants seeking asylum in European countries presents either a windfall, or a headwind to a country’s economy. It remains to be seen what the net effect will be, however the temporary boost in spending should, on the face of it, have a positive impact.
Finally, the discourse in the U.K around a potential “Brexit” (or British exit from the European Union) has certainly been edged in favour of such an outcome in light of the tragedy that befell Parisians recently. An increase in scepticism toward the E.U was noted in a poll run in the U.K, with a majority of respondents in favour of Brexit.