Possibility of a rare day's relative calm

The US stock market’s relatively orderly trading session might just give local markets at least one day’s respite from recent volatility and a chance to take a breather at the end of a frenetic week. Early indications suggest a firm opening to this morning’s trading.

This week’s stock market volatility appears to have been all about the Fed. Opinion is divided not only about what the Fed will do next week but also about how markets will react. While recent stock market volatility is being cited as a reason for the Fed to be cautious about lifting rates, this might not be the case if the Fed came to the view that it was the main cause of this volatility.  There’s a possibility the Fed might ultimately provide a market circuit breaker by lifting rates and providing increased certainty about the likely path of monetary tightening.

Yesterday’s Bank of England minutes noted positive economic prospects and encouraged markets to the view that it’s likely to follow the Fed next by beginning to lift interest rates next year. This provides context to the view that markets might ultimately see Fed rate tightening as a positive development, providing leadership to global markets and allowing interest rates to normalise as economies gradually improve. While there’s a long way to go, the recent improvement in Australia’s job growth, if continued, could ultimately put the RBA in a position to follow the Fed and the Bank of England in lifting rates.

The oil market is finally getting some concrete news of production cuts in the US. Average daily production last week was down 5% from the peak in June. However, the impact of what might otherwise have been a more positive development for markets, is being blunted by the looming spectre of increased exports by Iran. The US Senate last night cleared the way for President Obama to ease sanctions against Iran.