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What makes it more interesting is the widening gap between the hawks and the doves. Most are looking at the ECB to expand its monetary policy, including the possibility of a further cut to the deposit rate, which will take it deeper into the negative from the current -20 basis points.
On the other end, the markets are firmly in the belief that the Fed will finally raise interest rates in December after several ‘delays’ this year. As of 27 November, the implied probability of a rate hike in December is at 78%, according to CME Group FedWatch tool, compared to just 52% in the previous month.
This development has caused the world to fuse into a large consensus trade, which is to buy dollar and sell commodity trade. Probably also sell some short-dated US treasuries too. The dollar index climbed back above 99.0, but still unable to break the big 100 mark. The Bloomberg Commodity Index showed the level hovering near to its lowest since 1999!
The risk is that should the Fed not play ball and chooses another delay in December, one can only imagine the reverberation it may cause across the financial markets as the giant consensus trade comes undone in a jiffy. Market volatility will spike, as uncertainty fears wash over global investors.
The potential, even if it is probably unlikely, for such a scenario would mean that next week or so will be critical ahead of the FOMC meeting in 16-17 December. One of the key piece of data before the Fed meeting is the incoming non-farm payrolls data next Friday, 4 December. The consensus is for the addition of 200,000 jobs in November, after October’s surge of 271,000.
However, the range of estimates varies from 130,000 to 267,000, and needless to say, a considerably low number, perhaps like what we saw in August and September, may see traders getting cold feet about their consensus trade. Furthermore, Fed chairman Janet Yellen will provide her testimony to the Congressional Joint Economic Committee about the economic outlook, which would set the expectations concerning the pace of the policy tightening.
There will also be a flurry of central bank meetings in the coming week, with the ECB probably the most important to watch, given the possibility of more stimulus measures as the Eurozone economic recovery remains fragile. Canada and Australia will also be setting monetary policy. Both are expected to keep current benchmark rates on hold.
China’s SDR inclusion and OPEC meet
Meanwhile, I will be keeping an eye for other key events. On Monday, 30 November, the IMF’s executive board will decide if the Chinese yuan should be included in its Special Drawing Rights (SDR) basket as the fifth ‘reserve currency’, alongside the USD, GBP, EUR, and JPY. It is widely believed that this decision is as good as a done deal, with various positive comments from the IMF on CNY inclusion, as well as a favourable IMF staff report.
On a related note, there could be concerns that China would devalue its currency once they achieve reserve currency status, although I feel any depreciation will be more market-driven than an attempt to boost its export competitiveness. Fears of RMB devaluation has sparked off a wave of risk selling in Asia after Chinese industrial profits saw a contraction and the authorities fixed the weakest CNY mid-point in nearly two months.
As such, yuan devaluation may be a topic to monitor as we head into December. Clearly, a weaker yuan will make it more costly for China to buy foreign goods, thus exacerbating an already sluggish global demand.
Next, we have the OPEC meeting on Friday, 4 December, where the 12-member group will decide on their collective quota, which currently stands at 30 million barrels a day. However, OPEC has exceeded its output target since June 2014, with an average of 31.6 million in the first ten months of this year.
Saudi oil minister recently commented that there should be discussion on stabilising oil prices, which may include reducing production, to ease the supply glut issue. However, the analysts’ consensus is for an unchanged production target.
Furthermore, we have Iran announcing its plans to increase production by 500,000 barrels a day after international sanctions are lifted. So it looks unlikely that we would see relief in the global glut. Not only would this benefit the refiners of oil-consuming regions, it should also keep traders who are shorting crude futures.
Brent and WTI have fallen about 21% and 20% respectively, after dropping about 50% in 2014. Brent is trading around $45 on Friday, while WTI is at $42-43 a barrel.
It looks like the STI is battling downward pressure, despite overall gains in Chinese shares since August. The Monetary Authority of Singapore’s warning about risks for Singaporean lenders did not help sentiments. The MAS highlighted that weaker balance sheets and currency market volatility may be key risks for local banks, adding that non-performing loans have increased.
The non-performing loan ratio rose to 1.5% in Q3, from 1.1% a year ago, MAS reported, with a downturn in the manufacturing sector increasing the number of bad loans in that industry. MAS comments added pressure to the three Singapore banks, whose share prices have been slipping in recent sessions, targeting Sep/Oct lows.
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