20th October 2014
Last weeks’ shake up in the financial markets was dramatic, to say the least. All the ingredients for the storm have been lingering in the background for months (in some cases years) - overvalued stock markets, concerns over growth in China, risk of deflation, geopolitical tensions in Ukraine and the Middle East and uncertainty over global monetary policy. However, it took one good stir with Brent crude reaching a 4 year low, UK inflation dropping more than expected and the most important ingredient: uncertainty and fear to trigger the big sell-off (the threat of Ebola probably didn’t help either), leading to stipulation that 2014 could be the next 2008.
Let’s look at the five spookiest financial market events of the last week:
1. Volatility is back
Volatility has reached the highest level in two years, surging above 25 points using the options volatility index (VIX). Although this is...
13th October 2014
Deutsche Bank’s recent prediction of a 25% decline in the value of the euro over the next two to three years is based upon the theory that the ‘Euroglut’, the excessive amount of European savings generated by Europe’s large current account surplus, will lead to “the largest capital outflows in the history of financial markets”. We look at three potential problems with this prognosis…
“As equity, fixed income and FDI outflows pick up, the euro should face broad-based weakening pressure. Our end-2017 forecast for EUR/USD is 95 cents”
Euroglut: a new phase of global imbalances
6th October 2014
Listening to financial pundits over the last month or so, you could be forgiven for thinking that selling the euro versus the US dollar was as close to a one-way bet as you can get in financial markets these days. Following an incredibly strong performance by the USD...
6th October 2014
Last week we had a big flow of positive US data. The headline US unemployment rate has decreased from the previous 6.1% to 5.9%, with a change in non-farm payroll adding 33k more jobs than expected, almost doubling the August figure of 142k. As a result, markets have shifted the expectation of rate hike sooner than summer 2015, driving the dollar higher with GBPUSD breaching the psychological level of 1.60. Despite the prevailing optimism, looking at the employment report in more detail reveals cracks in US labour sector:
1. Labour force participation
It’s all about perspective. Although the unemployment rate is at the lowest level since 2006, the labour participation rate is at the lowest rate since 1977 (chart I) at 62.7%. The number of people not in the labour force has reached a record high 92.6 million. Partially this can be attributed to retirement (baby-boomers retiring) and...