Wednesday February 17

US equities rise for the third consecutive day. The S&P500 gained 1.7% to 1,926 and the Dow Jones rose 1.6% to 16,453. Today’s gains coincided with a rebound in oil prices following the Opec agreement yesterday. The FOMC minutes from January’s meeting were released, and showed that members of the Fed agreed that the financial market turmoil made the outlook more uncertain. The dovish tone of the minutes may further have contributed to gains in equities. Although the lingering concerns regarding China and the health of the financial sector remain, equities have fared well this week in the absence of any catalysts. Although China today weakened the daily fix of the renminbi, investors still look to the strong fixing over the weekend as a sign that the renminbi will remain firm in the near term. Brent crude oil jumped 7.2% to $34.50 and WTI added 5.5% to $30.64. Gold prices rose as the dollar finished slightly weaker against a basket of currencies. The dollar lost 0.2% against the yen to Y113.83 and gained 0.1% against the euro to $1.1133. The British pound continues to lose value as a Brexit continues to be priced in. The 10 year Treasury yield rose 4 basis points to 1.81%.

The minutes from January’s FOMC meeting showed that members of the Fed acknowledged that risks to the health and recovery of the US economy were rising. Risks in particular that were noted were falling commodity prices and uncertainty regarding the outlook for the renminbi against the dollar. Falling commodity prices are a large drag on inflation, and constitute a deflationary pressure that go against the intentions and policy goals of the Fed. If the renminbi weakens further this is a headwind to the global economy and trade. The minutes show that the Fed will be very patient regarding future rate hikes. The Fed now appears to be waiting to assess future economic data before making any additional decisions. This was interpreted as dovish by the markets. The Fed also noted that the risks and conditions in financial markets have led to tighter financial decisions in an of itself without any additional increases to the Fed funds rate.

The agreement made by Saudi Arabia and Russia yesterday to cap oil production called for other large producers to follow suit. Iran does not seem willing to comply with the requests of Opec. Iran just last month started to dramatically increase its oil production following a decade of sanctions, and is not willing to cap its potential. This increases tensions in foreign relations between Iran and Saudi Arabia, who have opposing interests and foreign policies that are unrelated to oil production. Saudi Arabia dramatically increased its production when Iran’s sanctions began, and now Iran is actively looking to take back the market. This makes it difficult for Opec to coordinate a response to low prices and puts pressure on the agreement made by Russia and Saudi Arabia. In spite of Iran’s initial response to the agreement, analysts believe that the deal nonetheless is a step in the right direction, and that they will be able to come to some sort of agreement at some point. Iran has said that it will not considering limits to production until the country is producing one million barrels a day. Iraq remains another stumbling block to the deal, as Iraq has said that it will consider production cuts only if other countries do as well.

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Wednesday February 17

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