It was the year Microsoft released Windows 98, Google was founded, France beat Brazil in a nail-biting World Cup final, Titanic won 11 Oscars and Celine Dion’s heart going on topped the charts for weeks. It might not be “flashback-Friday”, but today’s action in the Russian rouble has given everyone old enough to remember a more unpleasant reminder of 1998, when the currency collapsed and forced Moscow into a sovereign default. The rouble has plunged by more than 11 percent against the dollar today, in its steepest intraday fall since the last Russian financial crisis 14 years ago, as confidence in the central bank evaporated after an ineffectual rate hike of 650 basis points to 17 percent. The price of crude oil sliding by more than 40 percent in three weeks hasn’t helped either. One of our guests today, 7 Investment Management director Justin Urquhart Stewart, pointed out that when the Soviet Union collapsed in 1989, the oil price had fallen sharply.
Russian PM Vladimir Putin has been criticised by the West for many things, but one of the most frequent criticisms among market watchers has been for his inability or unwillingness to wean his country of its dependence on oil exports. So does that mean history will repeat itself and bring another crisis with it? Unlikely, Justin said, but “unlikely” doesn’t mean “free of pain” either, particularly as inflation rockets. “The question will be whether the unwritten bargain between the oligarchs and Putin would ever break down if that were to be the case, then we could have a serious political issue on our hands and this would cause a far wider disturbance. But, for the time being, Russian interest rates impact will have a limited effect elsewhere,” Justin said.
Mario Draghi is not giving anything away in terms of timing for the European Central Bank’s next decisions over monetary policy. After leaving monetary policy unchanged for the third meeting in a row and dropping the heaviest hints to date that sovereign bond-buying, or quantitative easing (QE), could become a reality, the euro lurched today to a session low of $1.2280 before rattling back up to $1.2442.
This jarred some of GMF’s resident euro bears, who now say the first quarter of next year will be “the” time to aggressively short the single European currency again. The ECB has dragged its feet, among many, many other (German) reasons, on conducting QE. But the one it has cited most frequently, at least to our minds, is its desire to assess the impact of the programmes it already has running, such as near-zero interest rates, cheap targeted long-term lending, purchases of asset-backed securities and covered bonds.
Can you guess what the link is between Australia and Canada? Yes, both have English as an official language and keep the European backpacking industry in business. But this week, we’re looking at how the currencies of the two countries can tell us an awful lot about the state of the global economy. Our guest today, DailyFX strategist Ilya Spivak, says he’s looking closely at the Aussie dollar/Canadian dollar cross as a relative play on U.S. versus Chinese growth, “…with CAD being a beneficiary of stronger U.S. performance while AUD suffers from China weakening.” This currency pair has risen by 1 percent so far this year, compared to a 9-percent drop in say, the value of the euro against the dollar. Yet at C$0.958, AUD/CAD is nearly 7 percent off the one-year high it hit in April.
That certainly jives with what we’ve seen in terms of the performance of the U.S. and Chinese economies so far this year. Growth in the United States, the world’s largest economy, ran at an annual pace of 3.9 percent in the third quarter, up from a rate of 2.6 percent in the final three months of 2013. Compare that to Q3 growth of 7.3 in China, Australia’s biggest trading partner, which saw a rate of 7.7 percent achieved in Q4 2013. We’re also seeing this same theme play out on the equity markets, which have gorged over the last few years on a diet of cheap liquidity from the world’s major central banks. U.S. stocks are up a tasty 12 percent so far this year, but this might seem a little frugal compared to the 23 percent rise in the value of Chinese blue chips since January. Ilya is wary of the outlook in China, so does that mean go short AUD/CAD? “Not yet, but thematically yes,” is his recommendation.
If the European Central Bank wants a shot at sorting out the euro zone’s financial problems, it should really give up tinkering with the short-end of the yield curve or buying relatively tiny amounts of assets that won’t do anything to increase the size of its balance sheet and get on with some proper sovereign bond-buying. That was the view of our guest this morning FOREX.com research director Kathleen Brooks. Kathleen, who also contributes to Reuters Opinion pages on a variety of subjects, said there was still a big hurdle to buying government bonds as a means of keeping borrowing rates low and encouraging the flow of credit to the real economy. Not all the members of the ECB’s policy-setting body, the Governing Council, agree with the idea, for starters. “Short-term yields in the currency bloc are already so low, the ECB should not target those, they need to target further out the curve to lower rates further, this would also send a powerful signal that (it) is going to suppress yields for the long term,” Kathleen said.
A recent Reuters poll of economists shows the market is pricing a 50-percent chance of so-called quantitative easing (QE) happening, up from a 40-percent chance in September. As for the ECB’s plan to increase its balance sheet by a trillion euros, in part by buying asset-backed securities and covered bonds, Kathleen said this wasn’t the way to go at all. “I don’t think that will do much to help the economy or boost the ECB’s balance sheet to 2012 levels, the rules over purchases are too stringent and the market is not big enough,” she said. The ABS market in Europe reached about 180 billion euros in issuance last year, compared to the U.S. market of 1.5 trillion euros. “As we know from the Fed and the BOJ – sovereign QE is the best way to go to achieve balance sheet adjustment,” Kathleen added.
Markets love a challenge and what better kind of challenge than testing the resolve of a central bank? Plus it makes for such great headlines. The Swiss franc hit a 26-month high against the euro yesterday, inching closer to the Swiss National Bank’s three-year old cap on the exchange rate. The SNB hasn’t exactly issued a Mario Draghi-style “whatever it takes” promise, but it’s been pretty clear that it won’t allow the franc to break below its self-imposed threshold of 1.20 francs per euro, which it set to stave off recession and deflation. “The last time they propped up the peg, there was some talk that they were buying EURCHF with one hand and selling EURGBP with the other. I think we’re seeing that borne out already in the recent declines in EURCHF,” our guest today, CMC Markets analyst Michael Hewson, said.
The last time the SNB stepped into the market to defend the cap was two years ago. It might find that more difficult to live up to that promise now, especially with the euro seemingly only capable of heading south right now. “The SNB is going to find it difficult to hold the line on EURCHF given that its reserves already amount to over 40 percent of euros,” he said. The SNB held 460.427 billion Swiss francs in foreign currency at the end of October, compared with 462.117 billion francs in September. This is almost double what they were when the SNB imposed its EURCHF limit. “The CHF crosses will bear the brunt if they show any signs of a crack in resolve,” Michael said. The SNB isn’t out of options, at least not yet. There might not be any Draghi-style pledges, but perhaps it might have a Draghi-style toolbox. “I’m wondering if we could see the SNB do negative deposit rates in an attempt to defend the peg,” he added.
Spanish bond yields are down today as the market shrugs off the results of the informal referendum in Catalonia on independence from Spain. Turnout was small as a percentage of the overall population of the region, but the undeniable fact is nearly 2 million people voted in favour of independence and the central government can’t very well ignore it, even if it did try to block the process. “This is a process or movement that has been building since 2010, when the Spanish constitutional court pared back key elements of a Catalonian statute of autonomy,” Aengus Collins, lead analyst for Spain at the Economist Intelligence Unit, or EIU, told us. “The direction of travel is clear, and ultimately the central government is going to have to respond more creatively than it has done up until now.”
Spanish bonds, on which yields are close to record-lows around 2 percent, underperformed most euro zone bonds last week in the run-up to Sunday’s ballot. The fear among the trading community was that a big turnout could stir up tensions between Madrid and a region which accounts for one fifth of the country’s economic output. The “consultation of citizens” in Catalonia follows a legal block by the central government of conservative Mariano Rajoy against a more formal, yet still non-binding ballot which regional leaders had been pushing for originally.
It was supposed to be boring. That was the feeling in the markets earlier today ahead of the European Central Bank’s November policy meeting. Yet ECB President Mario Draghi still managed to startle currency traders into pushing the euro to fresh 26-month lows after he warned there was room for the central bank to cut its forecasts for growth and inflation as the regional economy sputters. A Reuters exclusive story this week that highlighted the growing discomfort among the ranks of the ECB Governing Council over Draghi’s leadership style had already rattled the euro. Our guest this morning, Agenda Research economist Lorcan Roche Kelly, said while he might not be especially popular, Draghi isn’t going anywhere. “There is some discontentment with him, but there is no sign of a challenge to his leadership,” he said.
Super-Mario himself was keen to lay this idea to rest. For starters, we lost count of the number of times he said “unanimous” or “unanimously” in relation to questions about today’s policy decision by the Governing Council. “When we differ in our views and our policies … there is no drawing of a line between North and South. There is no coalition, not at all,” Draghi said in response to a question from a reporter on the Reuters story. We also couldn’t help but notice that Reuters ECB correspondent Eva Taylor, one of the co-authors of the article in question, was one of the last reporters to ask a question during the press conference. A coincidence? Probably, but this was not lost on the GMF community
The euro can’t seem to catch a break. The single European currency is on track for its first monthly rise in percentage terms since June (good for the eur-optimists) but is still only about 1 percent away from two-year lows against the dollar. Today’s aggravating factor was a media report that said at least 11 of the 130 European banks under European Central Bank scrutiny will fail the central bank’s stress-tests, the results of which will be officially known on Sunday. The ECB appealed for calm in the markets and basically said speculation wasn’t helpful, while our guest today, BNP Paribas group chief economist William De Vijlder, said the stress test, or Asset Quality Review (AQR) as it’s officially known, isn’t the be-all and end-all that some might be hoping for but will go a long way towards repairing something lost in the maelstrom of the global financial crisis: confidence.
“The ECB lending survey shows the balance between banks tightening versus easing has improved significantly and the balance between banks expecting pick-up in demand versus those expecting a decline has improved even more significantly,” William said. “However, to see this translated in real numbers, there needs to be confidence at the lender’s and borrower’s side. On the former, that’s where AQR can help, a bit.”
Today the World Health Organization declared Nigeria free of the deadly Ebola virus after six weeks with no new cases, an achievement with lessons for countries still struggling to contain the deadly outbreak. And hopefully it serves as something of a reality-check for countries where the media has worked itself into a frenzy about the potential for disaster. Our guest today, Reuters Sub-Saharan Africa bureau chief Pascal Fletcher, recalled the words one health worker said to him in the early stages of the current outbreak: “One Ebola patient is an epidemic”. While that might be true, outside the infection hot-spots of Sierra Leone, Liberia and Guinea, it’s business as usual. “The fear factor is very high, magnified of course by the media frenzy in the U.S. and in Europe; but things should be put into perspective; life does and must go on,” Pascal said. “For many people in Africa, worrying about Ebola is a bit of a luxury outside the core epidemic countries; so many people have enough to worry about just making ends meet in a continent where sadly poverty and disease are still part of the daily struggle, though things have been and are definitely improving.”
The news flow on the Ebola outbreak, the worst on record, seems more positive this week. The Spanish nursing assistant who contracted the disease in a Madrid hospital while treating a dying priest is expected to be declared free of the virus this week. Health authorities in the United States, where one person died from the disease in Texas and two nurses who treated him became infected, are putting together new care and prevention guidelines to stop the spread of the disease. Guidelines are all well and good but, ultimately, the only way to truly halt the virus, which has killed over 4,500 people in West Africa so far, is to keep the focus on Africa, according to Pascal. “All the efforts should be concentrated on eradicating this outbreak on the ground in the core countries; that is the only way to completely eliminate the risk of it spreading elsewhere in this highly-interconnected global village we now live in,” he said. Pascal went on to tell us that, in his view, the biggest contribution the developed world can make now is to get medical “boots on the ground” – supplying the staff to manage the patients to prevent the spread of the disease – backed by enough resources to build and supply the necessary Ebola treatment units, a big part of Nigeria’s success in ridding itself of the virus.
Of the mainstream commodities, oil is now 2014’s worst performer, having lost nearly 20 percent in the last six weeks, as investors, fretting about the prospects for global demand and the abundance of supply, have punished the crude market. The oil price, which is below $90 a barrel for the first time in two years, has unwound nearly half of the gains made from the depths of the financial crisis, to the four-year peaks seen in early 2012.
While lower oil prices — and the cheaper motor fuel prices that will ensue — might actually be exactly what the developed world’s cash-strapped consumer needs to start spending money, it’s inflicting undeniable pain on the oil producers. Each is waiting to see who will blink and cut first. Our guest today, Natixis head of commodities research, Nic Brown, said the squeeze extends well beyond OPEC and expects some projects in the United States, which is exporting more oil now, in the form of products like diesel, than at any time since the 1950s, to now be below cost. “We’d put (average) break-evens in a wide range, from perhaps as low as $55 a barrel to $85 a barrel, if not slightly higher,” he told participants in a multi-room chat with the Global Gold and Global Base Metals Forums.