We are ending 2014 with the dollar continuing its pressure on the rest of the currency landscape. Opening up in Europe, the USD is sat at a two year high against the euro as markets increasingly price in the chances of a mid-year rate rise by the Federal Reserve, while also seeing a pick-up in the pace of subsequent rises afterwards. Some analysts think we could see rates higher than 1% by the end of 2015 in the US. While we think that a stretch, we are very much happy with the thoughts of a June rate rise.
David Miles, one of the MPC members currently voting for rate rises, told the Telegraph that it is possible that when his term expires in August, he will be the only member of the Bank of England to not have seen rates rise during his tenure. I still think that rates will rise here in the UK towards the back end of 2015 but the nature of inflation targeting is the main risk to this.
The Bank of England is similar to the Federal Reserve in so much that recent communications have stated a belief that the recent falls in inflation have been “transitory” and that will be looked through. 2014 has been marked by a Bank of England leaning on a lot of issues to justify its reticence to raise rates; unemployment initially, and then wages with brief fears over the fall out of the Scottish referendum thrown in for good measure. You can see similar concerns keeping the hand from the rate hiking lever.
The only other real story in markets at the moment is what is going on in Russia. We have seen some stabilisation in the ruble following a cessation in the declines of oil prices. Moving forward though we have to see Russia as a wounded animal now and wounded animals have a tendency to lash out. At the beginning of the year, there were a lot of commentators saying that Putin had played a blinder and that his diplomatic tactics were heralding a new relationship with the world.
The moves in oil markets have seen this to be false. So the impact moving into 2015 remains on the corporate sphere and the political sphere. Corporate bankruptcies are coming, on that I have no doubt. Currency crises leave debts at the whim of something outside of a corporate’s control. Defaults are the natural end to this cycle.
On the political side of things, Putin is more difficult to call but how can he not feel isolated? Russians are built on a lifetime of cold winters but this one could be the coldest for the country since 1997.
Of course, we are coming into the dying embers of the year now and the incentive for investors to put on new positions is fairly poor. There are lot of things that people are talking about for 2015 – a stronger USD, European Central Bank QE, continued yen weakness via Abenomics – but we think markets will wait for the fireworks and champagne of the New Year celebrations to fade before doing much about it.
This is the last Daily Update for 2014. What a year it has been and what a year 2015 is set up to be already. I would like to thank all our readers who constantly keep me on my toes in an attempt to keep the content fresh, interesting and worth reading. May I wish you all a very Happy Christmas and festive period and I hope to see and hear from you all a lot more in the New Year.