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FED member Lael Brainard did not disappoint the Doves by stating in a nut shell the case to raise US interest rates is “less compelling” arguing that US inflation was not where near the FEDS target of 2%. This helped stocks reverse their earlier morning’s falls. European stocks opened up 0.50% higher this morning as a result with the USD trading softer across the board.
Federal Reserve Governor Lael Brainard argued for a cautious approach to raising rates, abating worries about higher rates sparked by another Fed official last week. As I wrote yesterday some investors were worried that Brainard could change her stance and move towards a hawkish stance thus adding conviction that a US rate hike was on the cards. As things stand then there has been no real change and now as the blackout begins (no FED news) we simply have to wait until the 21st to see if they will or won’t hike rates. As I have said time and again my view is the FED should wait until at least December allowing the dust to settle post US elections and more importantly allow another 3 months for data to confirm the “true” state of the US economy (in the face of Brexit and China). I have further stated that I think if data does continue to shine at the current rate, there is a strong case for the FED to hike by 0.50% (rather than 0.25%) and thus fulfil their desire to raise rates to 1% by close of 2016.
What could help the FED’s case for hiking 0.50% in December is an improvement in China’s economy. After a sluggish July, China’s Industrial Production rose to 6.30% from 6.00% (YoY). In other words if this improvement continues for the next few months coupled with small rises in US inflation there will be a very strong case for the FED to hike (surprisingly to many) by 0.50%. What a strong message this will give the market and in so doing send investors clamouring for USD (assets) and setting the tone for the USD (FX) for 2017. We all expect the USD to hit PARITY and a hike of this nature could be the tonic that sets the currency moving in this direction. Oil seems to be finding strong support in the $47.50p.b area and should prices continue to tick higher this will help the US achieve their inflation target. So I guess you can see where I am going with all of this. Hike 0.50% in December on the back of improvements in US NFP, higher oil prices and solid China data.
As far as the GBP is concerned, we saw a late rally yesterday as the currency floated through 1.33 handle. We continue to trade around these levels this morning with GBPEUR trading around 1.1860 and looking less pressured on the upside. Regarding Brexit, the Government has basically announced they will not be keeping a running commentary on how negotiations are going. Of course there will be leaks but I doubt there will be officials updating us on the progress. The reason is the information could have serious consequences for financial market volatility so staying away from the press is the safest option. PM May stated “The new relationship will include control of movement of people from the EU to the UK, and it will include the right deal for trade in goods and services, it would not be right for me or this government to give a running commentary on negotiations”. What we have heard over the weekend though is British citizens may have to apply for a visa (and pay of course) to visit the continent (EU states). Unreal!!! We have just gone back 50 years. So much for progress and putting a man on the moon. Furthermore (as I mentioned yesterday) Leave camp dropped one of their KEY pre referendum pledges £350mio extra a week spent on the NHS (money diverted from the EU to the NHS). MPs have now demanded the group admit the lie (I said this yesterday) and apologise (waste of time) or justify the transfer and when it will happen (never!!). Lies – lies and more lies that what the Leave group campaigned and unfortunately 17.4mio people lapped it up. I am lost for words.
A number of high profile EU members have already announced the UK will not find it easy at the negotiation table. Emmanuel Marcon (French Economy Minister) said the City’s “Passporting rights” would not be preserved unless the UK contributes to the EU budget and no concessions on freedom of movement while Danish PM Rasmussen told Bloomberg he was urging his colleagues not to give Britain a good deal. Honestly, be prepared for outright gun slinging and an almighty punch up (not literally). The UK is about to be taught a very tough lesson on the consequences of jumping ship and not allowing women and children to occupy the first life boats. Prepare to start swimming in open water ladies and gents…the sharks are circling!!!!
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