20160218 – DAILY UPDATE


The risk on environment is starting to bed in, but my confidence that the worst is finally behind us will only increase when we get above 1948 on the S&P 500. At that point we could confirm a ‘double bottom’ pattern which is a fairly reliable reversal signal that technical analysts like me use. Sentiment was certainly aided by the minutes of the FOMC meeting, yesterday, which showed that US policy makers were becoming increasingly concerned by the tightening financial conditions in January, (financial conditions become tighter when share prices fall) thus potentially making further rate hikes this year unnecessary. Ironically stocks rising now will make it more palatable for the FOMC to increase the likelihood of rate hikes later in the year!


Iran is unlikely to want to play ball, no matter what the Russians and Saudi agree to, in terms of oil production cuts. I don’t blame them, over the years that Iran has been in purgatory, other OPEC members expanded production to meet lost Iranian output. These member’s haven’t cheerfully cut back production to enable the Iranians to reclaim what they would consider their rightful place in the production rankings. So it would be highly surprising if Iran now accommodates anyone, they have their own specific objectives having been starved of cash and resources. Whether this by itself caps the oil price remains to be seen, but I suspect it will do. That said, a technical analyst I have great respect for can see the conditions being set for a decent rally for the black gold. We shall see.


It looks like the South African central bank, SARB, was right to get in front with pre-emptive rate hikes. Inflation in South Africa has accelerated above 6% for the first time in almost a year and a half. It’s likely that the hawkish actions of the central bank, coupled with improving risk sentiment will see the rand appreciate further as it recovers from its recent woes. Well… unless there are more political mishaps, and no one can really account for that!


Keep an eye on Brazil. The deteriorating situation there, whether in terms of the economy, the politics or the potential catastrophe of the Zika epidemic, has seen the South American giant’s credit rating downgraded, and placed on negative outlook which implies S&P might implement further downgrades. I still worry that Brazil could be the large developing economy that is responsible for global systemic crisis. It’s worth monitoring.


What I found most striking about the reaction to the FOMC minutes was that there wasn’t much of a currency market impact. It makes me think that the greenback is no longer over owned and thus any dollar positive news could result in substantial moves. I’m still thinking that we’ll see new lows for EUR/USD and GBP/USD in the coming weeks and months. Yesterday’s price action has done nothing to dissuade me.


Finally.. a lesson that the Nigerian government would do well to absorb. The Venezuelan government have bowed down to economic reality and devalued their currency and also raised gas prices. In recent months the Nigerian government has implemented policies which look disturbingly similar to the path Venezuela had been on, seemingly rejecting economic orthodoxy. They would be wise to see what the Venezuelans have now been forced to do.




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