Market Insights – 25th November 2019

Each week, a team of experts shares its market views with you.

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Matterhorn Sunrise

Essentials

Economic figures published last week in the US are further proof that the country’s economy is firming up. We should know more about whether manufacturing output has picked up when the ISM is released in early December. Inflation expectations are still low, which means that the Fed will keep monetary policy loose in the medium term.

The UK’s manufacturing and services PMIs were soft, which is probably a result of the uncertainty surrounding Brexit and the general election in December. However, growth should accelerate in the coming months, since the Brexit saga is likely to be resolved and the government’s fiscal policy should become more expansionary.

As risk assets have done well, gold prices have fallen and are nearing their USD 1,400/ounce support level. Investors have become more bearish on gold, so it’s likely to remain at current levels.

A ruler of men

Christine Lagarde started her new job on 1 November. She will go down in history as the first woman to serve as president of the European Central Bank (ECB). She’s joined a central bank not known for its gender parity, and she will have to make do with being the only woman on the ECB’s board.

So far, the Lagarde revolution has been peaceful. She didn’t make any major announcements during her first official speech at a banking congress in Frankfurt. It’s probably a little early for her to break away from the legacy of the highly respected Mario Draghi. What’s more, she’s well aware that the eurozone economy is in need of support and that inflation expectations are desperately low. So she has not strayed from the more accommodative monetary policy put in place by her predecessor in recent months. Those policy steps included a cut in the ECB’s key rates, which moved further into negative territory, and another round of asset purchases, which have injected more money into the economy. Ms Lagarde has, however, warned there is a need for a “new policy mix”. Her underlying message is that the ECB alone cannot be responsible for shoring up the eurozone economy. So the spotlight is now on the region’s governments. They are being called on to bolster their fiscal policies. Negative rates make this kind of stimulus even more advantageous – governments can easily borrow the money they need to invest in growth vectors and the energy transition. And a number of countries – including Germany – have considerable leeway after running a surplus for several years. But the idea is not for weak economies to take on too much debt.

During her time at the International Monetary Fund, Ms Lagarde was constantly calling for structural reforms. She believes that governments need to find ways to reduce their current expenses and make long-term investments instead. She’s likely to remind Europe’s politicians of this in the weeks and months to come. Ms Lagarde also announced that she would conduct a strategic review of the eurozone’s monetary policy. Less than a month since the ECB welcomed its new president, it’s clear that in Europe more and more power is shifting to Frankfurt.

Aramco IPO – a political decision that won't resolve the sector's problems

It took drone attacks on Saudi oil facilities for investors to pay attention to oil again. Although the attacks caused global production to drop significantly for a couple of weeks, they had only a limited impact on oil prices. And two months later, those prices are back at pre-attack levels. This trend reflects investors’ dwindling interest in crude oil over the past four years.

Despite this lacklustre climate, the Saudi government has decided to go ahead with the IPO for its national oil company, Aramco. The government is following through on a promise it made in 2016 and seeking to raise the capital it needs to diversify its economy. To ensure the IPO is a success, the Saudi authorities will probably try to maintain an upbeat narrative. So a production cut cannot be ruled out at the
 upcoming Opec meeting next week.

In the longer term, supply and demand will continue to guide the market. This raises a number of questions: How will the move towards a more sustainable economy be managed as energy needs continue to rise? And will their tough financial situation allow unconventional oil producers in the US to increase production?

To go deeper

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