Fed warns on risky asset prices

Jeremy Thomson-Cook
Jeremy Thomson-Cook 09 November 2021

GBP: Bailey less hawkish

EUR: ECB “rise in inflation is transitory”

USD:  All change at the Fed?  

 

Sterling

The pound recouped some of its recent heavy losses yesterday as global bond yields declined further following the dovish Bank of England meeting last week. This aided a broad “risk on” rally across all asset classes. All eyes are now firmly on the next MPC meeting, due December 4th, where markets are pricing in a rate rise of 0.15%.Bank of England Governor Bailey toned down his recent hawkish rhetoric yesterday following last week’s decision to leave interest rates unchanged saying “much of the rise in inflation has to do with reopening after lockdowns” and that “the problem now is that what's pushing up inflation is not too much demand.”

Markets are also closely following negotiations with the EU over the N.Ireland protocol. The European Union has offered to remove a large majority of checks on goods crossing the Irish Sea in a bid to break the ongoing deadlock with the UK. They have however, reiterated that the bloc will not renegotiate the role of the European Court of Justice in enforcing the post-Brexit arrangements for Northern Ireland, and that a "big gap" would remain between the two sides if Boris Johnson continued to insist on its removal from the treaty.

 

Euro

The single currency remains in touching distance of yearly lows due to the ECB remaining steadfast in their stance that EU interest rates are going nowhere in a hurry while other central banks are keen to talk them up over over the coming two years. Markets are starting to get concerned that the very high Covid case count across Europe could lead to renewed restrictions just at the time when large parts of the Globe are re-opening.

 

US dollar

The dollar continues to trade close to yearly highs as markets await key inflation data due to be released over the next 48 hours. Overnight news that the Fed are becoming increasingly concerned over risky asset prices coupled with the possible knock-on effects from the ongoing Chinese property developer collapse have helped ease Bond yields further along with a Bloomberg report calling into question the re-appointment of Fed Chair Powell in February.

A surprise vote in favour of rival Lael Brainard would be seen as very dovish by currency markets but would also send shivers through the equity markets as she is known to be very tough on Wall Street investment banks, continually calling for increasing regulations.

 

Elsewhere

The Chinese property developer sector continues to make headlines as overnight news emerges that more companies are struggling to repay debt. With the Fed sighting this along with a general concern over excessive risk-taking markets are trading on the back-foot this morning.

 

Market rates

Today's interbank rates at 08.09 against sterling movement vs yesterday.

Euro €1.170 ↑
US dollar $1.357 ↑
Australian dollar $1.828 ↑
South African rand R20.26 ↑
Japanese yen ¥153.3 ↑

 

Have a great weekend.