All Eyes on Fed, Bank of Japan

Daily Analysis - 19/09/2016

Financial Markets Trend Sideways Ahead of Key Monetary Policy Decisions and Guidance


With the US Federal Reserve and Bank of Japan on deck this week, financial markets are in a holding pattern as limited financial news keeps a lid on trading volumes and market momentum ahead of the decisions.  Meanwhile, the main event remains the oil industry conference being held in Algeria amid renewed jawboning of a potential output freeze.

Federal Reserve Likely to Keep Rates on Hold

The Federal Open Market Committee (FOMC) will begin its two day policy meeting on Tuesday, September 20 and if the slew of recent soft economic data is any indication, the Central Bank is more than likely to desist from hiking rates just yet. The consensus on Wall Street is that there’s only a slim 12.00% chance of a September hike.  If the Fed does indeed decide to hold interest rate steady at the current 0.50%, it will become the third major central bank after the ECB and the Bank of England to keep rates unchanged during their September meetings.  With the prospect of a September hike looking remote, analysts now expect the Fed, under pressure from domestic savers, to raise rates in December.


Investors Anxious Over BOJ Decision

While the Fed is unlikely to throw in any fresh surprises, investors are growing anxious about what to expect from the Bank of Japan when it meets to discuss the state of the economy on Tuesday. Despite Governor Haruhiko Kuroda’s repeated assertions that negative rates are holding back some sectors of the economy, the controversial rate regime may come in to play once again as the central bank struggles to lift the stagnant economy. JPMorgan, in a report circulated last week, said the BOJ will, in all likelihood, slash interest rates from the current negative 10 basis points to negative 30 basis points.  In the meantime, the USDJPY continues to consolidate ahead of the decisions.


Crude Oil Feels Libya Jitters

Crude prices rebounded from lows in Asian trade following news that the ongoing military conflict in Libya has hit oil exports from the country. Clashes between the petroleum facilities guards that control Libya's oil ports and forces loyal to rebel military leader Khalifa Haftar has halted shipments from the Ras Lanuf export terminal. OPEC is monitoring the situation and may decide to call an emergency meeting this week, Secretary General Mohammed Barkindo told Algerian Press Service.  In the meantime, hopes are high for an output freeze agreement as major producers meet on the side lines of the industry conference being held in Algeria this week.  On NYMEX, crude futures for October delivery were trading at $43.80 a barrel at 02:00 GMT, while November Brent on London's ICE exchange gained $0.70 to $46.50 a barrel.


Gold Regains Safe Haven Appeal

After tumbling to a two-week low during the last trading session, gold prices rose in early Monday trade as uncertainty increased ahead of the Fed’s upcoming monetary policy decision. Spot gold edged 0.40% higher to $1,315.60 per troy ounce as of 05:00 GMT. US gold futures also rose a decent 0.70% to $1,318.80 per troy ounce.  Gold has been the standout performer of the year as investor confusion arising from the Federal Reserve policy see-saws and the UK's decision to exit the European Union saw investors flock to the safe haven metal. Gold has rallied close to 25.00% year-to-date and will likely be extremely sensitive to momentum in the US dollar over the coming sessions as the rate decision approaches.


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