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Hold Your Breath!

Nov 7, 2016

39

This is it everyone. The deep breath before the plunge. The next week is going to shake markets up one way or another.

Here in Britain we have the quarterly inflation report and a Bank of England announcement tomorrow. Just this morning the National Institute for Economic and Social Research - an independent think tank - released a report predicting that price inflation in Britain could "accelerate rapidly" towards 4% in 2017. That'll probably help prepare the ground for a more reasonable sounding and lower figure from the bank tomorrow.

There are further central bank meetings in Japan and the US this week too. Then on Tuesday, America goes to the polls. One way or another we're going to get change.

But today markets are quiet and contemplative ahead of all that. So let's take a trip around the fringes of the financial world and see what's lurking, what's important, what's risky and where the opportunities are.

When money dies: Venezuelan edition

On Monday I spoke to you about the politics of oil and why Opec wants to stabilise the price. Lower prices hurt it; higher prices bring shale and alternative oil back into the mix. It wants Goldilocks prices.

If you want an extreme example of what low oil prices do to a nation dependent on oil, look at Venezuela. The oil bear market crushed the economy.

That led to price controls, "stimulus" and now runaway inflation. Reports emerged over the weekend that people are now weighing stacks of currency to ascertain value, rather than using the denominated face value.

But don't worry! It's not hyperinflation. The Venezuelan central bank hasn't published price statistics for two years - working off the classic principle that if you don't talk about something, it isn't happening.

Japanese government bonds: the free market loses

Buying and selling government bonds used to be a staple business for many financial institutions. There are plenty of them around. There's plenty of appetite for them among private and institutional investors. And there's money to be made in dealing in them.

That's changing in Japan. The huge stimulus programmes the Bank of Japan is involved in means it directly intervenes in the government bond market. That's driving yields to crazy lows. And it's driving commercial banks out of the market.

Ask yourself: who wins in this situation?

Do the commercial banks? There's no money to be made so, no. The market as a whole? That depends on whether one organisation having a monopoly of a key financial market is a good idea. I would suggest not.

How about the Japanese people - does it make them richer, more prosperous? Not that I can see.

So who wins? The state. The government drives private enterprise out of the market for its own debt, leaving it free to control the price it pays to borrow money. That makes it easier to borrow more and more.

Question for the people of Japan: who will pay the money back?

Want to track the US election? Look at the Mexican peso

The sharp end of the US election right now seems to be the Mexican peso. Good news for Trump is translating into bad news for Mexico - and the peso is bearing the brunt.

There are obvious reasons for that, if you take Trump's rhetoric towards Mexico as anything other than the fantasy it is. But still. If you take the possibility of a Trump presidency seriously on any level, you need to figure out how that'll affect Mexico. That's what the markets are trying to work out.

Yesterday the announcement of a poll in which Trump performed well - or perhaps Clinton didn't perform well is a better way of saying that - triggered an immediate move down in the peso.

If you're a currency trader, this probably all spells opportunity to you. That isn't everyone's thing. But it can be highly profitable. Right now we don't publish anything relating to currency trading. Here's a question for you: should we? I'm all ears on nick@moneyweek.com.

Ukraine: a value hunter's paradise?

Finally, as The Wall Street Journal reported earlier in the week, the Ukrainian stockmarket is "going vertical".

That's either pure speculation or finally the bad news around Ukraine has been baked fully into the price and money is flowing back into the market, meaning it'll rise from here. It's a bad to slightly less bad trade, as Stansberry Research's Steve Sjuggerud calls them.

These kinds of situations require great skill to invest in. But get them right - invest as the market bottoms and turns around - and you can pick up businesses for pennies on the pound, far less than their true worth.

Is Ukraine a value hunter's paradise right now? I've put that question to Tim Price and Charlie Morris. We'll see what they come back with.

And on that note - make sure you read Capital & Conflict tomorrow. If you're interested in understanding how the preparation for Brexit negotiations is unfolding in Westminster, and you'd like to know how that'll affect your money, you won't want to miss it. It'll be with you by 11am.

Please note: This article was first published in Capital & Conflict on November 2, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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