Interest rate expectations not managed as well as Arsenal

Stock market volatility has ground to a half in the second half of the week. The price movement has been in other asset classes from the British pound to oil to government bond yields. A key risk for markets next week will be whether bond yields eclipse levels last seen during the onset of the correction in February.

FTSE 100 investors have celebrated the four-day slump in the pound. Multinationals from banks to telecoms led the gains, helped by supportive news as well as the drop in Sterling. A surge in the value of Sweden’s Ericsson spread good vibes across the telecom sector. Barclays investors welcome CEO Jes Staley’s wrist slap from regulators. The part of Staley’s pay package tied to the Barclays share price has probably already offset the size of the fine.  Shares of Shire fell for a second day after Allergan ruled out a bid to rival that of Japan’s Takeda.

The Bank of England shying away from a rate hike in May and disagreement about the Irish border after Brexit have been a double whammy for the pound. GBPUSD has seen a classic failed breakout at 1.435. It’s a return to the most hotly debated question in central banking. How gradual is gradual? We tend to support the view of the BOE’s Michael Saunders who on Friday said that “gradual need not mean glacial”. There will always be uncertainties but it’s been clear for a long time that the UK is not in need of emergency stimulus. We tend to think a rate hike in May is still on because UK interest rates are set by a committee. Not by the Governor who some may view as living up to his reputation as an unreliable boyfriend. If some meaning is to be taken from Carney’s comments, if a May hike does happen, it’s probably the only one this year. If only interest rate expectations could be managed as well as Arsenal under soon-to-be retired Arsene Wenger.

On Friday, oil prices rolled over from three-year highs. US President Donald Trump has found another financial market to tweet about. The Donald tweeted that OPEC has pushed oil prices artificially high. It’s hard to argue against, that’s the purpose of forming a cartel. It won’t have escaped Trump’s attention that rising gasoline prices can quickly eclipse any financial benefits to rust belt America from his tax cuts. The question is whether Trump has more than bluster on Twitter to impact the oil price. He probably does, but these tools are already in use. The US government has already opened up drilling rights on and offshore and US production is soaring as a result, adding to supply to the market.