The week ahead in markets
What would US tax cuts do to the dollar and bond yields? What's happening in the oil market? The FT's capital markets editor Dan McCrum talks to Daniel Garrahan about some of the big stories the FT is watching in markets this week
Filmed by Rod Fitzgerald. Produced by Daniel Garrahan
What would US tax cuts do to the dollar and to bond yields? What's happening in the oil markets? And how will the Bank of England avoid this week? Well, these are some of the big questions the FT is watching in markets this week.
Our Capital Markets Editor, Dan McCrum, joins me now. Dan, let's start with the US. How would US tax cuts affect both the dollar and bond yields?
Well, Why people are focusing on tax cuts this week is the Republican Party failed to repeal Obamacare last week, so their legislative agenda has stalled. And everyone thought there were going to be some very big and sweeping tax changes, but now attention is turning to maybe Donald Trump will need a win, so it will just be some small tax cuts. Cutting corporate tax rates, maybe personal tax rates.
And that could be bad for the dollar because people will look at that and say, this means federal spending is going higher and the deficit is going to expand. And that might push bond yields higher because bond investors don't like runaway government spending. And you might have thought that this would be good for the dollar, but actually, one of the reasons why the dollar is down about 10% so far this year has been sort of the reality of Donald Trump's administration and the Republican's inability to pass any legislation that they want. And so I think maybe this might feed into a narrative that actually the dollar is going to continue weakening.
Now, if we could just turn to the oil price. One of the clearest financial measures of the glut of supply recently has been the contango, which is now when Brent Crude almost disappeared. Could you start by explaining for those who the don't know what the contango is, and what the implications of this are.
It's a slightly technical thing. Really, what it means is there's a lot of oil sloshing around at the moment. There's a bit of a supply glut. So if you have the ability to store oil, what you do is you buy it now in the spot market and you hold on to it, and you sell it one or two months down the line for a slightly higher price. And the fact that that system exists is called contango. That is really a sign of this ongoing oil glut that we've seen really for the past few years with very weak oil prices.
Part of the reasons why this is happening is at the start of the summer, Americans go on holiday, and they all do lots of driving. That boosts the oil price. In the North Sea as well, all the rigs tend to shut down for maintenance. So supply is a bit less.
So at the moment the oil price, Brent Crude terms, it's $52 something. That's about the highest it's been in two months. But there were some people who were saying now the market gas moved from contango to what they call backwardation, which is the opposite. That is maybe a sign that the oil market might be tightening up a little bit more than it has been. Certainly, it's what people in the oil market are watching this week.
So finally, the Bank of England's Monetary Policy Committee is meeting this week. What can we expect to see there?
Well, it's going to be the meeting when they discuss the latest inflation report. That's the big sort of book which comes out on how the Bank of England sees the UK economy, how its forecasts for growth and for inflation. And we had a bit of a shock last month when the committee, which sets UK interest rates, voted 5 to 3 against an interest rate rise. Now, the surprise thing there was the 3 vote for an increase in interest rates.
I don't think we'll get this time. Since then, a lot of the data has softened. UK growth really isn't as strong as people expected. It was about 0.2% in the first quarter. It was a 0.3% in the second. So we might actually see some of those growth forecasts come down. But what people, I think, will be watching is how the committee votes. And anything other than a 6-2 vote against a rate rise, that would be a real surprise.