European markets fall again
It was another volatile day for investors, with oil prices hitting new seven year lows and Brent crude coming close to its lowest since 2004 before making a recovery. Traders were also nervous about the prospect of the US Federal Reserve agreeing the first interest rate rise for nearly a decade when it meets later this week. So the closing scores showed:
- The FTSE 100 finished down 78.72 points or 1.32% at 5874.06
- Germany’s Dax dropped 1.94% to 10,139.34
- France’s Cac closed 1.68% lower at 4473.07
- Italy’s FTSE MIB fell 2.42% to 20,506.56
- Spain’s Ibex ended down 2.1% at 9428.5
- But in Greece, the Athens market added 2.07% to 590.26
On Wall Street the Dow Jones Industrial Average has recovered from its early falls and it currently up 21 points or 0.14%.
Brent crude, having fallen as low a $36.33 a barrel, is now up 0.6% at $38.16.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
FTSE 100 closes at three year low
Leading shares in London have closed at a three year low after the continuing plunge in the oil price, and nervousness ahead of the US Federal Reserve meeting.
The final scores showed the FTSE 100 down 1.3% at 5874.06, its lowest level since early December 2012.
Markets are still under pressure ahead of this week’s US Federal Reserve meeting, as oil prices remain weak.
With Brent crude now down 1.7% at $37.27, the FTSE 100 has now lost 1% while the Dow Jones Industrial Average is down 100 points or 0.6% Joshua Mahony, market analyst at IG said:
Oil prices continue to dominate trading, with the FTSE 100 exhibiting major volatility and unpredictability in a largely mixed session today. Arguably, the correlation between oil prices and the FTSE is as strong as it ever has been, and with oil breaking towards multi-year lows, this is not a good sign for stocks. The positive influence felt by strong Chinese data overnight is all but forgotten by now, and instead the feeling is that markets are nervously preparing for the Fed decision. For that reason, the choppiness seen today could provide a format for future trading as we head into Wednesday’s announcement.
Updated
If the UK votes to leave the European Union, it would have a moderately negative effect on its credit rating, according to Fitch. The agency said:
[A vote to leave would raise] risks to [the UK’s] medium-term growth and investment prospects, its external position, and the future of Scotland within it. Longer term, the economic impact of leaving the EU is highly uncertain, but the impact on the rating dynamics would be less pronounced as many of the UK’s key rating fundamentals would remain intact assuming UK-EU trade relations are not meaningfully disrupted.
We forecast the UK referendum on EU membership to be held in the second half of 2016 following negotiations around the UK government’s proposals for reform. Our baseline is that the UK will remain in the EU, but the risk of “Brexit” is significant.
We expect the UK to be able to secure a deal reforming the terms of its EU membership. But there is a risk that the government may not get agreement to restrict “in-work” and family benefits for EU nationals working in the UK. It would then be harder for the pro-EU campaign to rally around the call to stay in a “reformed Europe”.
The often unpredictable nature of such referendums means there is a significant possibility that the vote will tip towards Brexit and lead to short-term volatility in financial markets. Market turbulence need not have any sovereign ratings impact, but how Brexit would be achieved is highly uncertain and the negotiations could be lengthy and complicated. This would raise at least three key risks from a ratings perspective.
The full report is here:
Fitch: Brexit Vote Would Be Moderately Credit Negative for UK
Well that didn’t last long. After a reasonable opening, US shares are trading lower as the oil price continues to slide towards eleven year lows. Added to that there has been some volatility on the S&P 500, supposedly due to high frequency trading.
So the Dow Jones Industrial Average is down 49 points or 0.2%, the FTSE 100 has fallen 0.8% and Germany’s Dax is down 0.7%. As for oil, Brent crude is down around 2% at $37 a barrel, now far off its 11 year intra-day low. Connor Campbell at Spreadex said:
Whilst not at its 4% nadir, a 2% drop for Brent crude has continued to weigh on the markets this Monday, pushing the previously positive global indices into the red as the day wore on.
Given the state of oil, and the gradually deepening shade of red in its commodity sector as a whole, it is fairly remarkable that the FTSE is only down by around 50 points at this point in time instead of facing a hefty 3 digit decline.
The Eurozone indices were just as bad as the FTSE this Monday afternoon despite the morning’s solid industrial data.
Whilst the relative lack of news has allowed commodities to rule this Monday, Tuesday presents a much busier schedule and, with it, a different set of problems. Inflation data is set to dominate, with the UK and US both revealing their latest figures. The US number is the more important of the two; expected at 0.0% against 0.2% last month, any dramatic movement downwards (however unlikely) could throw a spanner in the works ahead of Wednesday’s FOMC meeting. As that is the other reason Tuesday could be difficult; pre-Fed jitters have already added to today’s tricky trading, and with the proximity of that potential rate-hike growing ever closer investors’ nerves are only likely to intensify.
Here’s an interesting table from M&G’s retail bond team comparing the economic situation the last time the US Federal Reserve raised interest rates to the position now:
Key economic/market levels today vs start of last Fed tightening cycle. Very different, except oil at $36 pic.twitter.com/kW3Ef9kir7
— Bond Vigilantes (@bondvigilantes) December 14, 2015
Meanwhile in the currency markets, sterling has hit a seven week low against the euro at 72.79p as the single currency gained ground across the board.
Despite the concern about the falling oil price, it should not have too great an effect on the global economy, according to Capital Economics. It said:
The latest slide in the price of crude oil is clearly unsettling the financial markets, but it should not materially affect the prospects for the global economy. Even if prices remain below $40 per barrel, this would not prevent inflation from rebounding next year. What’s more, as the latest slide mainly reflects developments on the supply side, the fall in oil prices is not a signal of weakening economic activity...
In contrast to the dip in August, which was driven by concerns about the impact of developments in China on the demand for oil, the latest slide is largely due to the inability of OPEC to agree any formal target for supply. The recent fall in oil prices is not, therefore, a sign of renewed fears about global growth, let alone an indication that the world is slipping back into recession.
What’s more, we do not expect oil prices to drop much further, or at least not for very long...In short, cuts in non-OPEC supply and stronger demand should support a gradual recovery over the coming years.
If, however, we turn out to be wrong and Brent remains below $40 a barrel, the impact on global inflation would not be huge.
The upshot is that inflation should rise sharply in advanced economies even if oil settles around its current level. As energy typically accounts for 10% of the CPI in advanced economies, a rebound in energy price inflation from -10% to zero would raise the headline rate by around one percentage point. This increase would be more gradual, and the peak a bit lower, if oil prices do not recover, but it is still coming. Central banks will not change course simply because headline inflation looks likely to rise a bit more slowly than they had anticipated, as long as inflation expectations remain well anchored and core price pressures continue to build.
Wall Street opens higher
Ahead of Wednesday’s key US interest rate decision and amid oil prices sliding towards 11 year lows, the American stock market has managed to open on a positive note.
The Dow Jones Industrial Average is up around 50 points of 0.2% in early trading, giving some support to European markets, which are off their lows of the day. The FTSE 100 is up 0,2%, while Germany’s Dax is down 0.3% and France’s Cac virtually unchanged.
Updated
Don’t panic!
So says David Kelly, chief global strategist at J.P. Morgan Asset Management, to investors who are flapping about the prospect of a US rate rise on Wednesday night.
He is urging people to ‘under-react’ to any market ‘over-reaction’ this week if the Federal Reserve hikes (as appears likely).
Kelly argues that the US economic fundamentals are improving:
This week sees the release of the November CPI report which could show core CPI inflation rising to 2.0% year-over-year. A strong report on Housing Starts on Wednesday should offset weaker reports on manufacturing in the shape of the Industrial Production numbers for November and the Empire State and Philly Fed Indices for December. Flash Markit PMI numbers for the Eurozone, the U.S. and Japan should show more stability in manufacturing and more growth in services. Meanwhile, Unemployment Claims on Thursday should remain well below 300,000, indicating a still-tightening labor market.
“If the numbers pan out this way, it will confirm that the U.S. economy is clearly healthy enough for the Fed to begin tightening.
Lunchtime summary: Brent crude close to decade lows
Time for a recap of the key points so far:
A volatile morning’s trading in Europe has seen the oil price come close to hitting an 11-year low, as investors brace for a historic US rate rise this week.
US crude oil has slipped below the $35/barrel mark, hitting a new seven-year low.
Next big level for Brent is the 2008 intraday low of $36.20 and for WTI $32.40. On a closing basis it is $36.61 for Brent and $33.87 for WTI
— Neil Hume (@humenm) December 14, 2015
Traders blame fears of a supply glut, with Iran expected to accelerate its pumping in 2016 as sanctions are lifted. That adds to ongoing angst over Opec’s failure to curb production at its meeting 10 days ago.
After a decent start, European stock markets have lost ground. Investors are fretting about the oil rout - and the prospect of the US central bank hiking interest rates on Wednesday, for the first time in almost a decade.
This follows a solid selloff in Asia, where Australia’s stock market fell 2% and a gauge of emerging market shares hit a six-year low.
Economists are urging the Federal Reserve to act carefully when it meets this week; a US rate rise could hurt fragile economies worldwide.
Market turbulence continues to rock the junk bond market. Bloomberg reports that a fund named Lucidus has liquidated its positions, following several other funds who have been hit by falling demand for high-yield assets in recent weeks.
Elsewhere....
The chief executive of Royal Bank of Scotland has predicted that UK borrowing costs will remain at record lows next year.
South Africa’s currency has rebounded after prime minister Jacob Zuma chose a new finance minister, for the second time in five days.
And ECB president Mario Draghi has repeated his pressure on eurozone governments to reform. He also reiterated that the eurozone’s central bank could take more action to fight deflation if necessary.
The slump in the oil price is going to drag on inflation rates, and make central banks even more nervous about tightening monetary policy.
Peter Rosenstreich, head of market strategy at Swissquote Bank, believes it will prevent the Fed from hiking rates more than twice next year (assuming we get a rate rise on Wednesday):
The recent fall in oil prices should only increase the deflationary forces at work in the US, which have created a noticeable outlook divergence between the Fed and the market.
We are at the dovish-end of the spectrum calculating only two 25bp hikes in 2016, bringing the target range for the Fed Funds rate to 0.75 - 1.00% by year-end.
Brent crude is now down 4%!
This is pushing the cost of a barrel of North Sea oil very close to the financial-crisis-era low of $36.20, set in late December 2008.
Brent crude oil just one big algo trade from breaking the 2008 intraday low of $36,20
— Neil Hume (@humenm) December 14, 2015
US crude oil is also weakening further, down over 2.5% today at $34.68 per barrel.
The sight of the oil price falling another 3% today, towards its post-crisis lows, is causing alarm in the markets.
The Financial Times has a good quote:
“The year is ending on an uncomfortable note. The smell of fear is back in the air,” said David Hufton at London-based broker PVM.
Hufton added that Opec’s failure to cut production this month is continuing to drive the oil price down and down:
“The dam has collapsed and prices are in free fall with devastating consequences.”
This morning’s rally in European markets has fizzled out, dragged down by energy firms and commodity producers.
All the main indices are now in the red, led by a 1% slide in Frankfurt:
The latest tumble in the oil price has send BP and Royal Dutch Shell’s shares down around 1.8%.
Mining firms are also hurting, with Glencore leading the FTSE fallers, down 2.3%
The Bank of England have uploaded Minouche Shafik’s new speech on interest rate policy:
Treading carefully - speech by Minouche Shafik
It includes a chart showing how UK drivers delayed replacing their tyres when the financial crisis struck, and haven’t changed their behaviour since (teeing up a ‘tyre tread gag’....)
Updated
BoE deputy governor won't vote for rate hikes until wages strengthen
Minouche Shafik, deputy governor of the Bank of England, has begun speaking at the Institute of Directors’ HQ in London.
And Shafik is sounding rather dovish, telling her audience that she will not vote for an interest rate rise until she is convinced wage growth has recovered.
She says:
In deciding how to vote in monetary policy meetings each month, I look across a wide range of indicators. There are many signs that the economy is normalising - the labour market is tightening, consumption growth is solid, investment is recovering, and even productivity growth is showing tentative signs of a return. And although the downward pressure on inflation from movements in energy prices and the exchange rate are proving persistent, they will not have a permanent effect on inflation.
But, there is residual uncertainty about the relationship between the real economy and inflation – something economists refer to as ‘model uncertainty’ - which in this instance augurs for caution in setting monetary policy.
The most likely outcome is that wage growth will soon resume its recovery, but there are alternative states of the world in which it takes longer for that to happen. So I judge it prudent to tread carefully, and refrain from voting for an increase in Bank Rate until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target.
That may back up RBS chief executive Ross McEwan’s prediction that UK interest rates won’t rise in 2016 at all (as covered here).
Here’s Katie Allen’s news story on Shafik’s speech:
Updated
Yup, missed this one:
With everything else going on, few noticed silver's drop to a six-year low under $13.75/oz. pic.twitter.com/lsFQxL4yo9
— Eddie van der Walt (@EdVanDerWalt) December 14, 2015
Brent crude is also caught up in the oil selloff, hitting a new near-seven-year low today.
It’s currently down 3% to $36.78, only half a dollar above the low hit in February 2009.
Updated
The turmoil in the junk bond market (see earlier) has apparently claimed another victim.
Bloomberg is reporting that Lucidus Capital Partners has liquidated its positions, and returning funds to clients.
Lucidus was set up in 2009, when it raised $500m to invest in high-yield bonds. Like many in the sector, it has suffered from falling prices and growing anxiety over the sector.
Bloomberg’s Christine Harper explains:
“The fund has exited all investments,” Chief Executive Officer Christon Burrows and Chief Investment Officer Geoffrey Sherry said in the statement obtained by Bloomberg.
“We would like to thank our investors and counterparties for their support over the years.”
A redemption notice from a significant investor in October triggered Lucidus’s decision to start winding down the portfolio and shedding staff, according to a person familiar with the fund’s operations, who asked not to be identified speaking about internal deliberations.
Lucidus Has Liquidated $900 Million Credit Funds, Plans to Shut: https://t.co/Q5lEN0QeuA
— Tomas Hirst (@tomashirstecon) December 14, 2015
Another one bites the dust. Bberg reporting that Lucidus High Yield fund has liquidated and will close.
— Burnett Tabrum (@BTabrum) December 14, 2015
Updated
Oil is also suffering from the strengthening US dollar (which pushes down the cost of commodities priced in dollars).
Investors are anticipating receiving higher returns on US dollar holdings once the Fed raises borrowing costs.
Oil continues to plunge now at session lows, down USD 0.64 at USD 34.98, not being helped by the stronger USD seen this morning
— RANsquawk (@RANsquawk) December 14, 2015
US crude fall below $35/barrel
The oil price has lurched through another milestone, as the selloff gathers pace.
US crude oil just traded hands at $34.99 per barrel, a new near-seven year low.
WTI drops below $35 for the first time since Feb 2009 pic.twitter.com/sEFPcpjXnR
— Jonathan Ferro (@FerroTV) December 14, 2015
As explained earlier, oil is being hit by oversupply worries and anxiety over the likely US interest rate rise on Wednesday.
Updated
Draghi: Eurozone must tackle bad debts
Over in Bologna, European Central Bank president Mario Draghi is repeating his traditional call for eurozone governments to reform their economies and their monetary union.
In a well-worn refrain, Draghi is urging politicians to do more to tackle problems in the euro area, and pointed to the bad loans still sitting on some bank balance sheets.
Here’s a flavour:
Investment has been held back in the euro area by three things: weak demand dynamics, the still-high private debt overhang and fragile private sector confidence.
The euro area today needs to take additional steps, alongside supporting demand, to address the debt overhang and fragile confidence. Structural reforms are key to this end. It is clear that, in some countries, the large stock of non-performing loans (NPLs) is still preventing a stronger recovery in credit. All this explains why facilitating a work-out of NPLs has to be part of the package of policy actions to restore productive investment. The ongoing work towards a Capital Market Union (CMU) is an opportunity to accelerate progress also on this front.
If we are to truly underpin confidence, it is important that, even while dealing with more pressing priorities, we do not lose sight of the need to complete our monetary union.
Draghi also added that the ECB has all the tools it needs to bring inflation back up to target. If we need to intensify the use of those tools, we will do, he adds.
That’s a nod to investors who were disappointed that the ECB didn’t announce a bigger injection of stimulus measures 10 days ago, at its latest meeting.
More Open Mouth Operations from Mario Draghi of the #ECB https://t.co/SGmj0uzU9I
— Shaun Richards (@notayesmansecon) December 14, 2015
Shell-BG to cut another 2,800 jobs
Thousands of oil workers at Royal Dutch Shell and BG face an uncertain Christmas.
Shell has just told the City that it expects to cut around 2,800 jobs once its £47bn takeover of BG has been completed. That’s around 3% of the total company.
The layoffs will come after Shell has conducted a “comprehensive review” of the joint company’s operations in the UK. It is planning “office footprint rationalisation” - which is code for back office closures and cutbacks.
The move means that the merger will cost at least 10,000 jobs.
Shell explains:
These reductions are in addition to the previously announced plans to reduce Shell’s headcount and contractor positions by 7,500 globally.
The proposed changes are subject to deal completion, engagement with affected employees and relevant employee representatives. Further detailed work will be undertaken on the details of the proposed operational and administrative restructuring as part of ongoing integration planning.
Market update: Shares up, oil down
European stock markets are holding onto their early gains, while the oil price has hit a new seven-year low.
The FTSE 100 is still up around 31 points, or 0.5%, while France’s CAC is the standout performer, up 1.1%.
Ipek Ozkardeskaya, market analyst at London Capital Group, says:
“Risk sentiment is rather good at the start of this year’s last Fed-focus-week.”
Sentiment in the energy market remains subdued, though.
Brent crude has fallen by 1.3% this morning, meaning a barrel of oil from the North Sea costs just $37.41. That’s only $1.20 above the lows hit in 2009:
That follows those reports that Iran is pumping more oil, in preparation for the easing of sanctions (see 8.02am for details) which is adding to concerns of a major supply glut in 2016.
This chart shows how the selloff in junk bonds (or ‘high-yield’ assets) has already hurt investors this year.
Looks like this will be the first negative year for high yield outside of a recession https://t.co/WwMNSDNtUr pic.twitter.com/2vNUyg64k3
— Katie Martin (@katie_martin_fx) December 14, 2015
It would probably be better to describe junk bonds as ‘higher yield’ rather than ‘high yield’ these days, though.
Investors have driven down the yield (or interest rate) on sub-investment grade bonds in a dash to buy assets that actually delivered a return (given that safer assets such as short-dated German bonds now have a negative yield).
RBS CEO predicts UK interest rates won't rise in 2016
The head of Royal Bank of Scotland has predicted that UK interest rates will remain at their record lows for another year.
In an interview with Bloomberg Television, Ross McEwan said he doesn’t expect the Bank of England to hike anytime soon .
McEwan said:
I think the interest rates in the U.K. will stay low for longer.....
I don’t think they’ll be moving in 2016. So we’re building our business around the fact that they won’t be moving.
And if they do move, that’s nice to see. But it I think you’ve got to build your business around some of the -- not the worst case scenarios but the scenarios that don’t leave you, you know, hoping that something will happen.
In a wide-ranging interview, McEwan also said that the task of restructuring RBS’s investment bank was “very well advanced” - seven years after the bank was almost sunk in the financial crisis.
He also argued that he has to be “pragmatic” about paying bonuses to bankers - despite moves to cut City remuneration bills.
More here: RBS CEO Sees Investment Bank Profit 4 Years Away Amid Cuts
Eurozone industrial output beats forecasts
This is encouraging.... Industrial production across the Eurozone jumped by 1.9% year-on-year in October, according to data just released.
Output was 0.6% higher compared with September, reversing a 0.3% decline, and suggesting that European firms saw stronger demand during October.
Firms reported that demand for ‘durable’ consumer products was strong, followed by ‘capital goods’ (machinery and equipment).
Eurostat explains:
The increase of 1.9% in industrial production in the euro area in October 2015, compared with October 2014, is due to production of durable consumer goods rising by 4.2%, capital goods by 3.5%, intermediate goods by 1.5%, non-durable consumer goods by 0.7% and energy by 0.2%.
Euro area industrial production +0.6% in Oct 15 over Sept 15, +1.9% over Oct 14 #Eurostat https://t.co/JH8HPPwzBt pic.twitter.com/WOzdVj43on
— EU_Eurostat (@EU_Eurostat) December 14, 2015
Over in Greece, the government is launching a new push to get its austerity programme approved by MPs, to unlock more bailout funds.
The Athens parliament is expected to vote on various measures on Tuesday night, including unpopular privatisations and new rules to tackle bad debts.
It could be a bruising vote for Alexis Tsipras, Greece’s prime minister, who now only holds a majority of three.
Our Athens correspondent Helena Smith explains:
The Greek prime minister, Alexis Tsipras, has warned of the perils that his government faces after jumping another reform-for-aid hurdle with international creditors.
After a week of rigorous negotiations with foreign lenders, Tsipras’s leftist-led government finalised a deal foreseeing further privatisations, reforming the energy sector and opening up the market to non-performing loans. The agreement is slated to unlock another €1bn (£720m) in loans for the debt-stricken country next week.
Addressing Syriza’s central committee at the weekend, Tsipras spoke of the dangers that lay ahead. “There are forces that want to see Greece’s government fail,” he said.
The cost of insuring South Africa’s sovereign debt against default has also fallen this morning, following Pravin Gordhan’s reappointment as finance minister.
The cost of a South African credit default swap (which would pay out if the country defaulted), has dropped from 347 basis points to 320 basis points this morning.
That means it now costs $320,00 per year to insure $10m of SA bonds.
Updated
Dollar gaining ahead of the Fed
European currencies are losing ground against the US dollar this morning.
The pound has dropped by half a cent, to $1.516, while the euro has lost a third of a cent to $1.096.
Ilya Spivak, currency strategist at DailyFX, says traders are “repositioning themselves” ahead of Wednesday’s Fed meeting:
“Currency markets are in retracement mode to start the trading week.
The Swiss Franc, Euro, British Pound and Japanese Yen are trading lower having outperformed on Friday while the Australian and Canadian Dollars are in recovery mode having been the weakest over the same period.”
The South African rand is the best-performing emerging market currency, thanks to the sudden switch in finance ministers:
EM bounce largely confined to countries which did the Finance Minister Hokey-Cokey pic.twitter.com/7V3zJ4jHYE
— Burnett Tabrum (@BTabrum) December 14, 2015
Kit Juckes of French bank Société Générale is also worried about the junk bond market.
He predicts pain as investors who have piled into riskier assets in the search for decent returns try to cash out, particularly from energy and commodity companies.
Kit writes:
The news on Friday that Third Avenue Management is winding up its ‘Focused Credit Fund’ prompted plenty of parallels with the closure of mortgage-backed credit funds ahead of the financial crisis in 2008.
A decade ago, easy money was fuelling a surge in mortgage lending and it was investors in that market who took the hit as borrowers suffered from economic slowdown and higher rates. Part of the problem for US High Yield funds is that they have been forced down the credit curve in search of yield.
But commodity and especially resource-backed borrowers have been responsible for an outsized share of the growth in the market. On a positive note, the commodity market is much smaller than the mortgage market, especially in developed economies. On a negative note, it is now very clear that this is where the danger of even a small, extremely well-flagged Fed rate hike triggering a major reaction lies.
Updated
Some industry pros are looking nervously at the junk bond market, where the prospect of a US interest rate hike has already caused some ructions.
Junk bonds (company loans that are below investment grade) suffered a serious selloff on Friday, dropping by the most since 2011.
Anxiety was rife after a junk-bond fund named Third Avenue Management announced it was halting withdrawals while it tried to liquidate its holdings. Some traders have been reporting huge gaps between the prices being quoted on corporate junk bonds, and what buyers are prepared to stump up.
Veteran City analyst George Magnus suggests this upheaval might make the Federal Reserve think twice before raising rates.
You're a Fed governor. Junk bond bubble now bursting has your zirp fingerprints on it. What are you going to do Wednesday? Stick or twist?
— George Magnus (@georgemagnus1) December 14, 2015
(ZIRP = zero interest rate policy).
And as this chart from Marketwatch shows, problems in the junk bond market often (but not always) precede share selloffs;
More here: Why the junk bond selloff is getting very scary
Rand rallies as South Africa gets another new finance minister
South Africa’s currency, the rand, has surged overnight after the country got its third finance minister in a week.
The rand surged by 5% after respected politician Pravin Gordhan (a former finance minister) was appointed, in a remarkable U-turn by prime minister Jacob Zuma.
Last week, Zuma fired the incumbent Nhlanhla Nene (who had succeed Gordhan in May 2014), and appointed a relatively obscure MP called David van Rooyen.
That decision sent the rand slumping on the international markets; seemingly triggering a change of heart for Zuma, and a call to Gordhan (who had previously run the finance ministry from 2009 to 2014).
And that has prompted the biggest surge in the rand since 2008, although it only recovers some of the recent losses:
Let's put this #Rand "surge" into a bit of perspective #PravinGordhan pic.twitter.com/v9HrTv8WQg
— Kevin Crowley (@CrowleyKev) December 14, 2015
Analysts reckon that Gordhan is a good choice to steer South Africa’s economy, which is experiencing weak growth and rising inflation.
But investors are likely to be wary. As Mohammed Nalla, head of research at Nedbank Capital put it (via the BBC).
“Critics would say having a finance minister serving only two days doesn’t bode well for the reputation of South Africa.
“International investors are probably thinking: Why didn’t the president make a much more considered decision in the first place?”
Rand cheers return of Pravin Gordhan https://t.co/MZTwfg2603 - result is brilliant, process an unmitigated disaster for SA cc @CitadelSA
— Adrian Saville (@AdrianSaville) December 13, 2015
Updated
European markets claw back some losses
London’s FTSE 100 index of blue chip companies has climbed over the 6,000 market, as shares claw back some of last week’s losses.
European markets have all opened higher, up around 0.9%, having slumped by 2% on Friday.
Tony Cross, market analyst at Trustnet Direct, says:
So the last full trading week of 2015 is underway and – at least for now – traders seem eager to try and put some of the recent malaise behind them.
He argues that investors could see a US rate hike as positive news; it means policymakers think America’s economy is strong enough to handle higher borrowing costs.
What’s more, the sheer volume of surplus cash that is in play may well ensure that corporate borrowing costs barely feel any fall-out as a result of the policy change, mitigating some of the real downside for corporate balance sheets.
Updated
The prospect of a US rate hike has already spooked investors in emerging markets.
Today’s Asian selloff helped to send the MSCI Emerging Markets Index down to its lowest level since 2009.
The index, which tracks shares in most developing markets, has now dropped for 9 days in a row, and shed around 20% of its value this year.
China’s slowing economy, and the slump in commodity prices, have also hurt emerging markets:
Emerging stocks at six-year lows before Fed decision https://t.co/nLQPmatuwT pic.twitter.com/wJA39Wcl3A
— Richard Frost (@frostyhk) December 14, 2015
Fed must 'tread carefully' with rate hike
Stephen King, senior economic adviser at HSBC, predicts that US interest rates are unlikely to rise much in 2016, even if the Fed hikes on Wednesday.
He told Bloomberg TV this morning that:
The Fed needs to tread very carefully because China, and other parts of the world, are not as robust as the US itself.
The news that Chinese factory output grew by 6.2% in November, up from 5.6% in October, might reassure policymakers that Beijing is avoiding a ‘hard landing’.
But even so, King expects that the Fed will only raise borrowing costs twice, at most, next year.
Oil slides again
The oil price is dropping this morning, amid growing speculation that Iran will fuel the world’s growing supply glut.
Brent crude has fallen by 0.6% in early trading to $37.69 per barrel, while US crude is down 0.5% at $35.43.
And #oil just keeps on sinking...as Iran says "no chance" will delay plan to boost shipments pic.twitter.com/cbT7DmL267
— Caroline Hyde (@CarolineHydeTV) December 14, 2015
This follows reports that Iran is boosting its production levels, even before oil sanctions are lifted:
Iran is on track to ship 1.26 million barrels a day (bpd) of crude this month, according to an industry source with knowledge of the OPEC member’s tanker loading schedule.
That preliminary number, nearly a quarter higher than levels just two months ago, could stoke worries over a global supply glut that have intensified since the Organization of the Petroleum Exporting Countries abandoned its output ceiling on Dec. 4.
Iran and its eager potential trading partners have been quietly getting ready for life after sanctions, following a landmark July agreement with the West over Tehran’s nuclear policy.
Russia’s envoy to the International Atomic Energy Agency said last week he expected the deal would be implemented in January, leading to sanctions relief for Tehran.....
Asian markets knocked back
Over in Asia, stock markets have endured a bumpy ride today as the prospect of a US rate hike on Wednesday night dents confidence.
Japan’s Nikkei tumbled by 3% at one stage, closing down 1.8%, while 2% was wiped off Australia’s S&P index.
The Chinese stock market jumped by 2%, though. There was some relief in Shanghai after a new factory survey showed output hit a five-month high. But that didn’t stop the People’s Bank of China from allowing the yuan to hit its lowest level in four years.
From Sydney, my colleague Martin Farrer reports:
China’s decision to loosen its grip on the yuan and allow slow but steady depreciation in recent weeks has added to concerns that the world’s second-biggest economy may be more fragile than expected.
The move, which followed an announcement on Friday of a shift towards a trade-weighted basis instead of exclusively tracking the US dollar, will also heighten concerns that China is prepared to intensify a currency war with rival regional economies in order to keep its huge export sector competitive.
Welcome to Fed Week
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The waiting is nearly over! No, not for Christmas, kids, but for the first US interest rate rise in almost a decade (probably).
This week is all about the Fed, with US central bankers meeting on Wednesday night to set monetary policy. And there’s pretty much unanimity that the Fed will ignore recent market volatility and raise rates to between 0.25% and 0.5%.
After last week’s pummelling, markets are nervous this morning as traders brace for the end of the era of record low borrowing costs.
There is particular concern about the impact of a Fed hike on developing economies, who will be vulnerable if borrowing costs spike and capital flows back into the US.
Analysts at French bank BNP Paribas urge caution, saying:
With the US Federal Reserve likely to start its interest-rate hiking cycle next week, we reiterate our cautious view on emerging markets for the coming months.
Debt in emerging markets (EM) has risen significantly over the past ten years and EM currencies have weakened, heightening concerns about credit risk.
Asian markets have already fallen today, with Japan’s Nikkei losing 1.8%. European markets are heading towards a mixed open:
Our European opening calls: $FTSE 5955 up 2 $DAX 10351 up 11 $CAC 4555 up 6 $IBEX 9617 down 14 $MIB 20998 down 18
— IGSquawk (@IGSquawk) December 14, 2015
Also coming up today.....
We get a healthcheck on Europe’s factory sector, and hear from the head of the European Central Bank and a top policymaker at the Bank of England:
- 10am: Eurozone industrial production survey for October
- 11am: ECB president Mario Draghi is giving a speech at a conference in Italy
- 12pm: Bank of England deputy governor Minouche Shafik is speaking at the Institute of Directors in London
And we’ll be watching oil too, after crude prices hit their lowest level in seven years last week....
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