V-shaped recovery for dollar and indices

Indices and the US dollar see an end-of-week recovery.

Source: Bloomberg
  • Negative inflation means expansionary policies remain dominant
  • US industrial production falters once more
  • Tata Steel to cut jobs as government is called in

Financial markets seek to end the week on a more positive tone, despite some of the recovery seen yesterday fading. In a week that saw US, eurozone and UK CPI all within negative territory there is good reason to believe that we remain within an expansionary phase of monetary policy.

Driven primarily by the second wave of the ECB, Bank of Japan and PBoC, the overall monetary policy outlook remains bullish for stocks as long as rate hikes continue to be pushed back.

Previously the doves would cite a likely hike in early 2016 rather than 2015, yet the City seems to be increasingly filled with those expecting the Federal Reserve and Bank of England to remain static until mid-2016 at best.

Despite a major rise in US crude inventories, today has seen a strong rebound for oil and in turn this has helped some of the miners drive the FTSE 100 higher. Global indices have seen a strong recovery throughout the second-half of the week, with a high likeliness that we will see markets close relatively near the week's open.

The US dollar index has shown a similar V-shaped trajectory for the week, despite what should be an inverse relationship with global indices given the expectations that both the Fed and BoE will push back their rate hikes into 2016.

US industrial production added to the feeling of a slowdown in the US, falling by 0.2% in September, making it seven negative readings out of the past ten releases. The strength of the US dollar continues to be felt by exporters and with the Fed attempting to find the right time to hike, the fact that it could make this slump even worse will certainly not be lost on Janet Yellen and co.

Tata Steel is set to axe around 1200 from its Scunthorpe plant in yet another blow to the UK steel industry. Calls for the government to step in to save British steel are likely to draw comparisons to the recent steps taken to save the North Sea oil industry following a crash in crude prices.

The constant need for government intervention goes to show that despite the wishes for a more balanced UK economy, it remains the case that services will continuously dominate the UK economic landscape as less competitive sectors falter.

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