ETFS Multi-Asset Weekly – Markets Calm before Fed Decision
• Commodities: Persistent surplus weighs on oil prices.
• Equities: Global equity market sell off continues amid weaker PMI and US payrolls data.
• Currencies: Dollar stages a comeback after August jobs report
The US Federal Open Market Committee will convene this week to discuss raising interest rates. We don’t believe they will pull the trigger on this occasion, given the uncertainty surrounding the deceleration of China and Europe and elevated financial market volatility. The last time the central bank increased rates was in 2006 and will not take this decision lightly. A policy reversal will be costly for the Fed’s reputation and we think the central bank will err on the side of caution while it assess whether these risks are likely to drive price expectations lower or hurt labour market prospects. A surprise rate rise could be gold price negative.
Intensifying El Niño conditions drive agriculture prices higher. Cocoa rose 5.4% as El Niño drives dryness into West Africa where the majority of the world’s cocoa is grown. Wheat and corn prices rose ahead of the WASDE report by 2.5% and 3.5% respectively. El Niño could reverse some of the strong rains seen in Australia so far this season, hurting the wheat crop currently growing. US corn is currently vulnerable to weather changes. On the 15th September CONAB will release its Brazilian coffee harvest estimate. This report will end months of speculation about the size of the crop. There has been heightened uncertainty because of the highly volatile weather Brazil has experienced this season. Oil gave back part of the prior week’s gains. A surprisingly high inventory build led to a decline in of Brent 3.5% and fall in WTI of 1.8%.
Equity markets stabilise in a shortened week. The VIX (options implied volatility of the S&P 500) stabilised albeit above its long term historical trend with the S&P 500 and Russell 2000 indices in the US finishing the week marginally higher. The MSCI China A-Share has given back of all of last week’s gains today after the release of weaker than expected industrial production. Labor Day and Victory Day respectively shorted the US and Chinese trading weeks. European bourses trended lower despite an upward GDP growth revision indicating that economic conditions are somewhat better than previously assumed. However, the looming threat of US rate rises and global financial market conditions tightening gave European markets little cause for cheer.
Central banks continue to drive FX markets. The Kiwi depreciated last week as the Reserve Bank of New Zealand cuts rates. This week, the FX market’s focus will be on the Fed’s rate decision. Consensus is still looking for a rate rise this week, but the futures market indicates that a rate rise is more likely in December. There is also scepticism about December, given that financial market liquidity is usually low in that month. While domestic conditions in the US may be looking healthy, the threat of global conditions unravelling the momentum remains at large. The Swiss National Bank and Bank of Japan, two other policy makers of haven currency countries will host their respective monetary policy meetings, revealing their interpretation of recent financial market turmoil. We expect dovish rhetoric to depreciate the JPY and CHF.
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