Saudi oil struck, Fed cuts rates and China slows

20 September 2019

The Noise

  • In a widely expected move, the US Federal Reserve voted to cut interest rates for the second time this year, reducing the cost of borrowing by a further 25 basis points. Fed rhetoric continues to revolve around a strong US economy, and despite market expectations, has not committed to scheduling further cuts. 

  • Oil prices spiked this week after two drone attacks on Saudi Arabian facilities knocked out around 5% of global supply. Prices fell back after President Trump vowed to release US reserves, but with spare capacity so low the geopolitical risk premium seems set to remain. 

  • The repo market – a complex beast at the best of times – threw a spanner in the works this week, and no-one seems to know how it got there. The repo rate is effectively the price at which cash and collateral are moved around the financial system on a very short term basis; these transactions allow liquidity to move evenly around the system, like plumbing. This week that system unexpectedly clogged up and rates temporarily soared. The Fed stepped in to provide emergency liquidity, but questions still remain as to why this happened in the first place.

The Numbers


The Nuance

Despite the fact that we are now only weeks away from the Brexit deadline, from a global investor’s perspective the real focus is on what’s happening further afield. Trade tensions do seem to have eased between the US and China, but the attack on the Saudi oil facilities highlighted the fact that geopolitical risks are by no means receding. The global economy is chugging along, but the picture from the US is mixed and China continues to slow down, meaning that investors need to think very carefully about how they position portfolios.

Short term investors have the hardest job at the moment; safe haven asset classes carry hefty entrance fees and it’s hard to predict which high risk assets will reward investors over the next few months. But long term investors need not feel the same kind of pressure; indeed they have the material advantage in the current scenario. If you have multiple years over which to hold your assets then you have the luxury that we do, to operate with moderate caution while holding enough liquidity to take advantage of market weakness, and to let the quality of your holdings dictate the direction of your returns, rather than the economic environment.

Quote of the week

“A royal flush”
“I always liked heist movies and finally I’m in one of them, Maurizio Cattelan, artist
Two men have been arrested this week for the theft of an 18 carat solid gold toilet. The piece, an artwork by Maurizio Cattelan entitled “America”, was stolen from Blenheim Palace, where it had been installed for visitors to use. The artwork – famously offered to President Trump in 2017 – is said to be a “comment on the American dream”, but we wouldn’t want to speculate on its meaning.  

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