The three critical decisions that will influence the markets this month
One key decision down and two more to go before the end of the year. The Opec agreement to cut oil production over the weekend marks the first of three important policy decisions being made this month.
The other two will be about Brexit in the coming week in the British Parliament and about US interest rates in the following week by the US Federal Reserve.
The Opec deal was clearly more than the markets were expecting, with crude oil prices rallying 5 per cent on the news. Opec and its partners, most critically Russia, will cut production by 1.2 million barrels per day for six months, with Opec countries taking 0.8 million bpd of the cuts.
The agreement effectively unwinds the production increase Opec instituted at its previous meeting in May. Since then ouput has increased steadily from producers that had the capacity to do so: Saudi Arabia, the UAE, Iraq and Russia.
The latest deal involves Opec trying to manage the optics of the oil market carefully: cutting from October 2018 production levels means that several countries will be cutting from near-record high output and avoid drastic damage to domestic economies.
A cut of 1.2 million bpd will help to alleviate some of the stock build-up anticipated in the near term and help to keep prices from extending their 30 per cent decline from October peak levels. But with a market surplus of 1.5 million bpd forecast for the first quarter of 2019, the cuts will not be enough to completely offset the mounting inventories. Opec members such as Saudi Arabia will also count on supply disruptions from countries like Venezuela, Iran and now Canada to persist for the latest cuts to have an impact.
In the coming week the highlight will be the UK Parliament’s vote on Theresa’s May’s Brexit agreement with the EU tomorrow. The chances of it being passed on the first attempt are very low, so it will be the scale of the defeat that will matter to markets.
A narrow loss might allow Mrs May to fight again, and perhaps to negotiate a few amendments to get it passed on a second vote. However, a heavy loss could bring down her leadership and make the Brexit process appear in chaos, which would probably mean the pound losing further value. Whether these losses are sustained depends on what happens next.
Most probably it will be Parliament itself that will take the initiative away from the UK government to manage the Brexit process, and this could result in a number of outcomes, not all of which are negative for sterling. In particular, it is possible that another deal is constructed, and/or that there could still be a second referendum.
It may also happen that the deadline for Brexit is extended from March 31 to allow a new deal to be crafted. Any of these outcomes means that the upcoming week’s decision will not be the end of the issue, and that Brexit will continue as a focus of uncertainty well into 2019.
The third important policy decision to be made will be the Fed’s on December 19. US jobs data on Friday, while showing a slowdown in jobs growth in November, also showed that wage pressures are building. This should make a decision by the Fed to raise interest rates in less than a fortnight relatively straightforward. But again it will be what comes after that will determine how the markets respond.
Investors have already revised down sharply their expectations for US monetary tightening, amid a weakening of inflation expectations and global growth worries. So it will be the messages from Jerome Powell about the future path of rates that will be crucial for markets.
None of the decisions being made in Vienna, London and Washington will bring finality to the issues that they address, but they are all important in shaping the way the markets will perceive them as they approach the coming year.
None of the decisions being made in Vienna, London and Washington will bring finality to the issues that they address