There are two major factors that could determine the course of global financial markets as we move closer to the end of the year. Broadly speaking, they fall into two major categories – central bank policies and geopolitics.
The first factor is led by the U.S. Federal Reserve. As the Fed winds down quantitative easing, markets are wondering when it will give more specific guidance as to when it will raise short-term interest rates. It will have to at some point, and when it does, history shows that there will be a significant reaction as markets shift expectations and financial planning. At this week’s FOMC meeting, despite the fact that short term interest rates will remain near zero for a “considerable time”, the Fed did raise guidance for slightly higher interest rates in 2015 and 2016. This prompted a sharp move higher in the U.S. dollar against many G10 and emerging market currencies.
This is particularly important relative to the Fed’s global peers. Many other major central banks have turned less hawkish, or in the case of the European Central Bank, have actually lowered rates. When the Fed clears up the question of timing, it could lead to a stark bifurcation of rates expectations globally.
The second factor is the path of geopolitics, and in particular, the effects on the global economy of the availability and price of oil. This can be summarized with the question “How cold will it be in Europe this winter?” Currently, major economies are relatively unified in the response to many of the issues in the Ukraine, Russia and the Middle East. But when economies get squeezed, will that coalition stand or will hardships force a rethink?
An argument could be made that a third factor in the next couple of months will be the U.S. midterm elections and the general election in Brazil. There are certainly times when events such as these affect the global financial equilibrium, but both of these are more important domestically, and it is difficult to see them as influential outside their borders.
My View: It is hard to predict a surprise. However, I do expect that we are in for a very active next few months as we head into year-end. We look forward to keeping our viewers and readers in the loop.
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