Oil and equity markets have been the talk of the town since the beginning of 2016. There were no signs hinting to a possible bad start at the end of 2015. Markets were caught off-guard by the free-falling oil prices and panic selling in the China equity market, the effect quickly spread across the globe. Last week, the equity markets seem to have stabilised and oil has rebounded from the bottom by $5, are the bears just taking a time-out? In our opinion, definitely!
Having seen a strong rebound in oil price, retail investors may be tempted to hop on the bandwagon with the bulls. If you are thinking to long oil, please proceed cautiously. The situation around the world has not taken a 180-degree turnaround. Demand for oil remains weak and supply is likely to increase since sanctions on Iran were lifted. For us to see a sustainable recovery in oil prices, we would need a healthy growth in demand and also some form of moderation in production.
Three Central Banks are scheduled to release their official statements this week.
The Federal Reserve is unlikely to announce a back-to-back rate hike this month. Even if 2016 went on with a rosy start, the chances of back-to-back rate hike are low. Although recovery in US remains the best among the major economies, but even the world’s largest economy cannot ignore what is going on around. We expect the Fed to maintain a cautious approach towards their next rate hike. If the statement is very dovish, we could possibly see a sell-off in the Greenback.
The Reserve Bank of New Zealand had four rate cuts in 2015. Situation in China is weighing down on the Kiwi and the 2 consecutive drops in diary prices are not helping either. Having said so, we will be surprised if they announce a rate cut, just immediately after a December rate cut. If the Fed adopts a more cautious approach towards their tightening, it could lessen the pressure on the Kiwi.
The Yen has strengthened close to 6% against the Greenback and 11% against the Yuan since its weakest level last year. Low oil prices are keeping their import cost low and making it tougher to achieve their inflation target. The strengthening Yen is a concern to their export sector, but we believe the impact is relatively small, as their export industry has come a long way since the days of a Dollar to 80 Yen only. If Bank of Japan does not take any action or make plans for any action, it may be mission impossible for them to achieve their inflation target this year.
Top News This Week
US: Federal Funds Rate. Thursday 28th January, 3am.
We expect figures to remain unchanged at 0.5% (previous figure was 0.5%).
New Zealand: Official Cash Rate. Thursday 28th January, 4am.
We expect figures to remain unchanged at 2.5% (previous figure was 2.5%).
Fullerton Markets Research Team
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