Good morning,

GFC redux?

Looking at the market headlines, you would think that we were back in 2008; markets tumbling, bank shares hitting the skids, a pound in the cross hairs and fears of a funding crisis. So far, so similar to the Global Financial Crisis.

Indeed, the news that Deutsche Bank may be mulling over buying back bonds from investors in a bid to sure up its risk position is eerily redolent of policymakers’ pronouncements during the depths of the financial crisis which would stop the bloodletting for half a day before the pain resumed.

Pressures in the world of currency have remained very much in favour of the yen, euro and Swiss franc as investors spent a lot of yesterday clambering for a port in this particular storm. USDJPY has broken below 115.00 for the first time in over a year despite negative interest rates in Japan, while EURUSD has run to the 1.13 mark. It looks more and more likely that EURUSD wants to take out the 1.15 mark; something that will cause a fair bit of wailing in Frankfurt given their policy efforts of late.

Yellen to stand up to further losses

The difference between now and the December lows in EURUSD has been driven by many things but front and centre is the Federal Reserve’s decision to raise interest rates at their meeting on December 16th. Happily enough, one of the architects of that rate rise is due to testify in front of the House (today) and the Senate (tomorrow).

We have often spoken of the tightrope that central bankers must walk when communicating policy to markets, especially via statements to politicians. Janet Yellen’s tightrope is more precarious than usual. It’s also on fire.

Her duty today is to signal that additional interest rate hikes in the US through this year continue to be forecast without seeming overly hawkish, whilst noting the recent weakness in global markets, fears of financial stability, deflationary risks and the ongoing currency war between Asian and European Central Banks.

I, for one, hope she carries it off but there is a lot to be said for optimism from a central banker not being reciprocated in markets; moves in equities, bonds and currencies through January were, in a large part, down to the markets expressing significant doubts over the Fed’s thoughts of four rate hikes this year. At the moment you’d get better odds of Donald Trump becoming President; both are terrifying prospects.

Yellen takes her seat at 3pm GMT and everyone will be watching.

UK data to further weaken beleaguered pound

Beforehand we have the small matter of UK industrial and manufacturing production figures for December. Industrial and manufacturing production is expected to dip sharply in December courtesy of warmer weather and a subsequent low desire for utility generation.

Someone said to me yesterday that in all of the volatility and fear that is floating around at the moment, the performance of sterling is the only currency that makes sense and I would have to agree. Rate expectations were kicked out as far as 2020 by one set of analysts yesterday, the referendum is cancelling out any near-term optimism and our current account position negates the opportunity for the pound to be seen as a safe haven from the current global issues. Nobody wants sterling at the moment and a poor industrial number today will see holders decline further.

The number is released at 09.30.

Have a great day.

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