Markets React To Plunging Oil Prices

That energy companies are struggling helped to topple Wall Street off its recent highs. It is notable that most all recent gains made by OPEC after its decision to cut production have been given up. Ongoing production by US and Canadian oil producers is keeping the market in oversupply. The sharp pullback in equity markets is the direct result of weakness in oil prices. Recall that rising oil prices are capable of driving up inflation growth in countries where central banks are targeting specific numbers. The Fed is targeting a 2% inflation rate, so is the Bank of England and the European Central Bank. Only the UK has exceeded the inflation expectation with a figure of 2.9% in its most recent reading. The Fed is battling persistently low inflation growth, despite its best efforts at gradual monetary tightening.

How is the GBP performing and how is it affecting the FTSE 100 index?

The governor of the Bank of England, Mark Carney has adopted a dovish position on the GBP, and this is driving the sterling to new lows, while helping to boost the FTSE 100 index to a degree. After the Prime Minister called a surprise election on June 8, 2017, the GBP lost its way alongside the Tories.

The sterling is a barometer of the stability of the UK economically and politically. Now that the Prime Minister’s governing ability is in jeopardy, the GBP is feeling the heat. The pound plunged to its lowest level in two months against the greenback, hitting 1.2625 on 20 June. The relationship between the FTSE 100 index and the GBP is negative. When the sterling retreats, the FTSE 100 index typically prospers. However, weakness in oil markets has led to a risk-off approach to equities markets globally. That the UK negotiating position vis-a-vis the European Union and the Brexit issue is now weakened is not helping matters.

Unfortunately for the GBP, political headwinds had precious little to do with the recent decline in the currency. It is more about economic issues courtesy of the BOE Governor, Mark Carney. Since monetary policy (interest rate adjustments and Bank of England purchases/sales) is a key component of GBP strength or weakness, what Carney says matters. He indicated that the bank rate would remain at its current level until further notice. This has the effect of dampening expectations of a rate hike and it leads to a selloff of the GBP on international currency markets.

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Chee Hin Teh 3 years ago Member's comment