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New Oil Deal to Fuel Inflation – 12th December 2016

 

New Oil Deal to Fuel Inflation – 12th December 2016

As the Far East markets opened this morning, the price of oil jumped 4.5% following news of bigger-than-expected production cuts, especially by Saudi Arabia. Today also marks the first day in the job for two new Prime Ministers, Paolo Gentiloni in Italy and Bill English New Zealand, who have replaced Matteo Renzi and John Key respectively.

The promotions of Mr Gentiloni and Mr English to PM from the posts of foreign minister and finance minister had considerably less impact than the oil deal. Analysts really do believe this oil agreement will stick as 11 non-OPEC producers have said they will support the cartel’s plan with cuts of their own. Although Canada did not join the 11 it also will reap the benefits of their effort and the Canadian dollar starts this morning as the top performer among the majors.

More expensive oil will exert upward pressure on all sorts of other prices. Little around the word is produced without the involvement of oil for chemicals, energy or transport. The OPEC-cartel’s move is the latest in a series of commodity price increases that have been rattling the cage of the inflation monster. It does not mean investors should suddenly expect interest rate increases in the UK or in the EU but it does guarantee one being delivered by the Federal Reserve on Wednesday.

The Euro continues to feel the ill effects of Thursday’s ECB press conference. From its level prior to that meeting it has lost one and three quarter cents to Sterling and two US cents. Investors obviously believe Mario Draghi’s reassurance that the changes to QE do not amount to “tapering”. Tapering got a bad press a couple of years ago when the Fed announced it would wind down its asset-purchase programme. Since then central bankers have been terrified of using the word, lest it trigger a sell-off in financial markets. When the European Central Bank president announced that his own QE programme would be extended at a reduced pace of €60bn instead of €80bn a month the Euro moved lower.

Quantitative easing by the ECB will continue until the end of next year. Mr Trump’s economic stimulus together with accelerating inflation will mean rising US interest rates. The combination encourages many analysts to expect the euro to fall through US$1 before too long.T

There are no ecostats of any consequence scheduled for release during the London session which should make for a calm day.