Rumors and Speculation Dominate the Markets

The markets are full of rumors, arguments and conjecture. And the upshot of all that is a market that is moving nowhere. There is no volume and no volatility. The causes are varied. Above all, the Russia-Ukraine conflict hangs over the markets like a dark cloud.

 

West-East Money flows
Money wants to move out of Russia and has only a few safe places to go. There is much talk that Hong Kong and its dollar is the preferred venue right now. The HK$ is tied to the US$ and the former colony is not subject to any US or European sanctions. How long this can go on remains to be seen. Moreover, it is not clear how much of that cash can be absorbed by Hong Kong.

Interestingly, the fact that China now allows two-way movement of funds and financial instruments between Shanghai and Hong Kong. With all that cash sloshing into Hong Kong some of it should find its way into mainland China.

 

Interest Rates

The big subject of conversation in the New York market is “when will interest rates go up”. No one has a good answer for that. The Fed is far from ready to raise rates, mainly because the US economy remains soft. There are growing voices, especially among members of the Fed’s governors and presidents to raise rates. The Fed has effectively ended its quantitative easing program, which has tightened monetary policy.

The big question for Chair Yellen is the development of the labor market. If employment improves further and especially if average earnings get better, the conversations about potential inflation and higher interest rates will become reasonable. But that will have to wait, probably towards the end of the first quarter.
That conversation is also the big topic in London. There, the Bank of England has now poured cold water on the interest rate topic.

The BoE just downgraded its wage growth estimate today and indicated that future developments on wages would  have a greater influence on interest rate decision.

The weak EU economy and the refusal of the ECB members to properly reflate the region’s economy is the other big drag on global growth.

Japan is the other problem economy. Abenomics has been a bust so far, primarily because Tokyo decided to introduce a sales tax, at the wrong moment.

It is thus unreasonable to assume that interest rates anywhere will go up.

Also unsettling the world of finance is the Israeli-Gaza conflict, the Iraqi disaster and the general Mid-East conflicts. But those problems almost appear to be secondary to the interest discussions. Thus, frustration about the outlook will continue for some time.