For immediate release: 8 December 2015
European QE, US Interest Rates & OPEC
Recent events suggest increased tension in emerging markets dependent on oil export revenues
and US Dollar denominated debt, says Rowan Dartington Signature’s Guy Stephens
We were reminded yet again last week that the markets are entirely focussed on external factors
rather than the fundamentals. The big story on Thursday was the size of the European QE extension
from Mario Draghi whilst Friday saw US employment payroll data which is key for the US interest
rate rise, and finally there was the OPEC meeting in Vienna, discussing oil price quotas.
The markets had clearly talked themselves into heightened expectations that Mario’s bazooka was
loaded and there was going to be a big bang. In the end, he delivered a six month timetable
extension to March 2017 on the same monthly QE purchases and reduced the deposit rate on ECB
bank balances by 10 basis points to -0.3%. This amounted to mere tinkering at the edges
and was interpreted by the markets as a big disappointment. There was a big swing in the
Euro/Dollar currency rate with the Euro strengthening whilst equity markets sold off as there was no
immediate extra stimulus per se.
On Friday, in the US, the payrolls data came in ahead of consensus forecast which made the odds of
a US interest rate rise an almost certainty. The decision on this will be delivered on 16th December
and is largely priced into markets. The focus will then shift to when the next rise will occur and there
are polarised views on this.
The much analysed dialogue from Janet Yellen has shifted in emphasis, with a key addition being a
desire to normalise rates and control the build-up of excessive personal debt. This was debated at
our last Asset Allocation meeting and comments were made that the monitoring of inflation and
linking this to interest rates didn’t stop the last three bubbles involving technology, commercial
property and credit. Indeed, there are signs in the UK that personal debt is actually above the levels
seen in 2007 due to low interest rates and a proliferation of deals, most notably car financing, and
inflation does not capture this. It was generally viewed as positive that the influence on rate
decisions may broaden away from an inflation target and more to economic stability including levels
of household debt.
Some say that Mark Carney, Janet Yellen, and now Mario Draghi, are all guilty of giving mixed
messages to the markets but then the markets are guilty of hanging onto every word and taking that
as decisive going forward whilst the macro-economic data is changing all the time. A benefit of
forward guidance is that we get greater transparency on Central Bank actions. However, the
downside to this is that Central Banks become a much greater influence over the markets and this is
very much what we are seeing. Daily analysis focuses on who is saying what and when, and precisely
what various comments mean. Committee member statements are also analysed and can easily
become the latest view of central policy, even though they are the views of one individual outside of
the Committee meetings.
And finally we had the OPEC meeting which was a complete non-event. This was dominated by
reports that the return of Iranian production next year is seen as the biggest threat to OPEC market
share as that will amount to 1 million barrels per day. This is unlikely to hurt the US shale producers,
which has been the main reason for maintaining supply above demand. The previous quota ceiling
was abandoned and this will be re-set once Iran has started production. Clearly, OPEC’s influence on
world oil markets has reduced to who can keep going for the longest at the lowest prices.
This suggests on-going caution and increased tension in emerging markets dependent on oil export
revenues and US Dollar denominated debt. The last thing they need is a weaker oil price and higher
US interest rates from here. It tells us that the Saudi’s are totally focused on maintaining market
share and hurting US shale producers, even if this causes pain for some of the smaller OPEC
members.