Commodities and oil related stocks in particular bounced on Tuesday from their oversold positions, helped by further speculation that the Bank of China is keen to do more to ensure their economy maintains the growth pattern that the rest of the world expects.
The newspapers were full of the move yesterday in the Russian Rouble, it never ceases to surprise how the investment community often has the mentality of a shawl of fish, seeming to ignore the tide and then move in unison. Russia's economy is based around oil, the main Russian Index, the Micex, is littered with oil and gas related companies. Any fall in the oil price is going to have a direct impact on the countries revenues, and therefore its currency. The Rouble has been gently drifting lower over the summer against the US dollar, partly as a result of the strength of the dollar, and then on Monday comes the capitulation as speculators appear to decide en mass enough is enough. That is generally the point of maximum pain in any market. As one would expect Russian bonds have also reacted in a negative way, for those looking for yield the ten-year Russian bond now offers nearly 11%. One can see by Monday's fall in the Rouble the inherent risk in buying bonds denominated in your non domesticated currency, the yield pick-up can often be more than negated by the fall in the related currency.
Today will be dominated by George Osborne's Autumn statement, on the one hand attention will be drawn to the budget deficit, on the other the Chancellor will be keen to focus on the strengths of the UK economy ahead of an election year. With debt to GDP running at nearly 100% the room for a tax give away is limited, and the Government have already made some concessions towards raising tax thresholds. Aside from concerns on the budget deficit, the chancellor will provide some economic forecasts for next year, growth should remain robust, but the statistic that may get attention is the productivity gap. If the Chancellor indicates that the gap is closing faster than anticipated, this may raise inflation expectations and therefore bring forward interest rate move expectations.
Our view is that the statement will be fairly neutral for equity and bond markets as the government will not wish to be seen to be making promises they will find hard to deliver, whilst at the same time not wishing to send a to austere message to the market.