The World Holds its Breath
The world, including the financial markets, continues to hold its breath, waiting to see what further tragedies await us in the Middle East. It may seem callous to write any column that does not pass comment on what has and is occurring at this present time, but as a financial observer, I am ill-equipped to comment further than that we join the world in wishing for a peaceful outcome. There is, of course, a clear and present danger that the conflict escalates beyond the present zone with all the risks to world security that it would bring. This, of course, would potentially cause chaos in the oil market just as winter approaches, and anyone expecting President Putin to step in to help needs their brains looked at. Indeed, the unexplained undersea explosion to the gas pipeline between Estonia and Finland that took place last week not only raised some eyebrows but also some questions,
Domestic US politics is also bubbling quietly in the background with a new Speaker still not selected after Steve Scalise walked away from his campaign. With the world in such a parlous state, it’s worrying that the free world’s leaders are domestically bickering. No wonder risk-off was seen as the trade of choice last week, and as a consequence, the dollar regained some poise at the expense of its peers. Against this backdrop, it is somewhat puzzling, not to say disturbing, that the financial markets, apart from an initial kneejerk reaction, have stayed remarkably calm. It appears that the US celebrating the Columbus Day holiday on Monday served to take some of the sting out of the markets, but even so, they were somewhat muted
Putting aside the tragedy, the fact that the much larger than expected Non-Farm Payroll number a week ago didn’t overly unsettle was a surprise. However, the higher-than-expected PPI and CPI released on Thursday certainly caused some ripples, with the dollar index rising sharply after the publication of the figure. A consistent cooing from a dovish chorus of Fed officials throughout the week gave the market what it wanted to hear. It does appear that the Fed is, at the very least, split on its next steps. The market is, of course, taking the dovish route with, according to the derivative markets, chances of a hike in November retreating whilst they now see a good chance of a cut earlier than expected. As I have said before, the wishes of the market don’t always translate into actions by the Fed, and they are certainly not going to ignore the signs that the inflation genie is not back in the bottle and the cork is far from inserted in its top. Being cynical, one wonders if to quote from Cold Comfort Farm, something nasty is lurking in the woodshed, or more pertinently the financial system. It is hard to see much difference in the week ahead when, rightly so, all of our thoughts will be preoccupied with the crisis in the Middle East; however, some points on the data docket may catch the eye. Sterling will should fall under the spotlight with the release of unemployment and wage data on Tuesday, followed by inflation data on Thursday, which may be best set for some time if Gas Futures are correct. With all things staying equal in geopolitics, the data released this week should give another clue to whether the Old Lady hikes or holds at her next meeting of the MPC, which concludes on 1st November. Away over the Atlantic in the US, Retail Sales are published where the rise in longer-dated yields has been seen as tightening policy, and the Fed will be hoping that this is reflected in the sales data. However when all is said and done there is only going to be one driving force over the next few days and that is whether the conflict in the Middle East spreads.