Good morning,

Production to remain strong

Tuesday mornings in 2016 have largely been spent explaining the vast and volatile moves with which Monday’s markets have started the week; today is no different. Oil is surging on a planned meeting between Saudi Arabia and Russia on oil prices, while Chinese equities and commodity currencies have also joined in the fun.

Oil prices are 5% higher so far this morning following the persistent rumours of a meeting between Saudi Arabia and Russia that is apparently set to begin in Doha. Saudi Arabia had previously said that it would not cut oil production unless non-OPEC member countries also agreed to a cut in production; the Kingdom still wishes to crush shale operators after all.

Fiscal issues, lack of income and tax revenue for oil producing nations, have been a macroeconomic undercurrent through 2016. A similar thing happened in the late 90s in a bid to drive a cut in production and holders of commodity currencies and those looking for a monetary policy normalisation by the world’s central banks will be hoping that history repeats itself.

Equities higher with Draghi helping

The rally in equity markets has helped support risky assets further this morning as well, but as we pointed out yesterday, there is a long way for equities to recover to regain the losses of the past few weeks.

Mario Draghi’s speech and Q&A session yesterday in front of the European Parliament added little to our thoughts of what the European Central Bank will plump for at its March policy meeting.

Draghi, as has become his new stock phrase, reiterated that the “Governing Council will review and possibly reconsider the monetary policy stance in early March”. The focus will be on two things, namely the pass through of low inflation from commodity markets into wage and price formations within the Eurozone and the negative effects of recent volatility in financial markets on the banking sector. If these are viewed to have had a negative effect on price stability then they “will not hesitate to act”.

UK inflation set to bounce on statistical changes

UK inflation is the main economic release of the day with the figure for January likely to be the first of these to be positively affected by the December 2014’s declines in oil prices no longer falling within the survey period and similar falls in food prices also no longer being counted. This could see headline inflation on the year increase by as much as 0.5% although the far more important core measure – that discounts away these volatile components – is expected to remain around 1.3%.

Any upward surprise in inflation measures in a climate of what may or may not be occurring in Doha could give GBP a nice run higher. It would certainly make up for the losses seen following Ian McCafferty, the most dovish member of the Bank of England, saying in an interview with the Wall Street Journal that the Bank of England had ‘scope to cut rates and revive QE’.

Referendum chatter will continue to guide the pound as well.


Elsewhere, the Reserve Bank of Australia minutes have had little impact on AUD although weaker retail sales in New Zealand clipped the NZD’s wings before the oil news hit the newswires.

Have a great day.

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