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Russia loses interest rate gamble

Russia’s rate rise had the opposite of the desired effect yesterday, forcing the Rouble lower by as much as 25% at one point, before regaining a modicum of composure later in the session. At it’s peak the rouble was trading at 80 per US Dollar and broke through 100 versus a single Euro. In Russia banks saw queues for people wanting to withdraw Dollars and Euros and shops saw people fighting to get their hands on goods before prices rose.
The knock on effects in other markets were significant, with all European markets moving between significant losses to significant gains over the course of the session. The FTSE closed up by 2.4% on the day, eventually, having only made a return to form, along with all other European equity markets, towards the middle of the afternoon.

UK inflation data showed the effects of oil yesterday, falling down to1%, or it’s lowest in 12 years. The move was broadly a market positive, with those calling it an early Christmas present for shoppers and others thinking it is likely to slow the Bank of England’s rate rise agenda outweighing individuals who think that the UK risks economic slowdown through individuals putting off purchases that could well become cheaper in the future. There’s an interesting article in the Wall Street Journal today about how official inflation indexes are failing to capture the speed at which prices are falling and that this current drop is, globally, the fastest and broadest fall we’ve seen since March 2009.

In Europe, the expansion of German manufacturing has fallen to a near two year low. Preliminary December PMI readings showed German output was below forecast and could well fall below the breakeven level of 50 in the near future unless something significant changes. German government bonds saw their yield drop to record lows on the news as investors pile in to the AAA rated bonds over fears for their capital.

Overnight we heard from ECB member Coeure who said that though the Central bank was looking at ways of facilitating quantitative easing, it was a little naive of the market to be so fascinated with the prospect, given that there are no guarantees that policies that worked in the US and Japan will work in Europe. We believe the fascination stems from continuing falling prices and output in even the most robust member states, such as Germany and the seeming reluctance for anyone in power, other than Mario Draghi, to acknowledge the elephant in the room.

In china, we’ve seen stocks out perform their regional counterparts on speculation that the People’s Bank of china could be lining up some additional stimulus measures. The FT points out that investors in China have been showing signs of manic trading that don’t normally appear until a market has been in a bull run for years – China’s has been going for just three months. Apparently on a few days this month trading volumes traded on the Shanghai index have been larger than all other global equity markets combined. The warning is that the stimulus the PBoC have put in place to date is fuelling markets, but not stopping an economic slowdown, which in turn widens the gap between stock market performance and economic reality.

Today we look at the Bank of England meeting minutes, so lots of focus on Sterling in the first half of the day. This evening is the FOMC rate announcement, where investors will be listening for whether Janet Yellen keeps the ‘considerable time’ phrase when talking about rates being low, or if this is removed in favour of something a little more quantifiable. Stock traders are hoping for a dovish statement so that they can go ahead and start their Santa Claus rally.