Oil hits a two year high

November 6, 2017

The Bank of England (BOE) Monetary Policy Committee voted last week to raise interest rates for the first time in 10 years. The BOE raised the base rate from the historically low 0.25% to 0.5%, reversing the cut made in the aftermath of the Brexit vote. Furthermore, the Bank has guided that the rate is likely to rise twice over the next three years. While markets were anticipating the interest rate rise the guidance given was less aggressive than anticipated and led to a fall in government bond yields and the Pound. Marginally higher interest rates are unlikely to impact the real economy significantly as many households have fixed rate mortgages and rates remain low. However, the rise will alert debtors to the dangers of higher borrowing costs and may encourage more cautious behaviour going forward. It is expected that the housing market will continue to be lukewarm and consumer spending growth weak in the near term.

Oil prices have continued to rise, reaching their highest level in over two years. The Brent Crude benchmark is now trading at over $62 per barrel, on the back of continued cuts to production made by OPEC and Russia. The oil market remains oversupplied, however, the excess amount has been reducing and inventories are less stretched. Speculative sentiment remains strong, although some participants continue to be concerned over the potential increases in production from US shale oil. At the current price, many of the shale producers will be able to bring greater levels of production online, potentially reversing the cuts made by OPEC. However, companies may be cautious about borrowing to increase production after experiencing significant pain in the market during the price crash of 2014. OPEC are due to meet again at the end of November to reconfirm the production cuts and determine future strategy.

The Eurozone economy grew faster than anticipated in the three months to September, at a rate of 0.6%. Over the last 12 months the region has grown by 2.5% and the unemployment rate in the region has fallen to 8.9%, the lowest in nearly nine years. The European Central Bank also increased its estimation for 2017 growth to 2.2%, supporting its decision to decrease the rate of quantitative easing. While inflation remains low, it is less of a concern as GDP and jobs growth will support consumption in addition to the external pressures from food and fuel prices.

 

 

Index Open Close Change % Change
FTSE 100 7505 7560 55 0.7%
S&P 500 2581 2587 6 0.2%
Dax 13218 13478 260 2.0%
Cac 40 5494 5517 23 0.4%
Nikkei 225 22008 22539 531 2.4%
UK 10 Year Gilt Yield 1.35 1.26 -0.09 -6.7%

The China trade balance and inflation data for October is due to be released on Wednesday and Thursday respectively. UK manufacturing and trade statistics will be released on Friday.