Financial markets have their eyes focused squarely on Libya and the spillover effect into crude prices. While there are side plots of inflation, safe haven trades and the BoE surprise lean towards tightening - the main story remains oil. While Brent has rallied nearly $10 since the Asian open to $119.79 high, activity in FX markets remains subdued with 1-month implied vols continuing to creep about very low levels. Perhaps the main reason for the lack of a legitimate reaction is that the political turmoil has been isolated to small oil producers and not one of the major production centers (Saudi alone has the ability to increase supply by 4 million barrels per day easily covering Libya's 1.5 barrel/day drop). However, protests are schedule to take place in Saudi Arabia today and tomorrow which will likely drive further oil volatility today. Considering the Saudi's willingness to temporarily step in with extra supply - it's too early be discussing a 1970-like supply side shock and how inflation and growth would be affected. Interestingly, pre-emptive action was taken by King Abdullah in advance of these protests, with a 15% pay increase for government employees, amnesty for imprisoned debtors and additional benefits for the unemployed and students. Equity markets were weaker in Asia after a weak Wall Street session. We still believe these moves to be part of a logical short term correction in a period of significant stress. However we do suspect that the correction will be deeper and longer than most believe. The Swiss Franc has continued to demonstrate that it's the go-to safe-haven of choice and will likely remain that way into the foreseeable future. Yesterday's surprise BoE meeting minutes had the vote at 6-3 with three members voting for no rate hike. Dale joined Martin Weale and Andrew Sentance in voting for rate hikes (Dale and Martin voting for 25 bp and Sentence 50 bp). The tone of the minutes were resoundingly hawkish noting that even those members who had not voted for a hike had thought that the case for tightening has increased. The hawks now only need two more members to complete the shift into tightening mode. We suspect that by May growth will have firmed up and the inflation level will remain - prompting other votes to follow. With nearly 25 bps priced in by June, the sterling near term support will depend on increasing forward rate expectations. We expect support for the Pound which will further be reinforced as the market plays catch up. Look for the Forex market to price in one to two more rate hikes for 2011. In the US, Initial jobless claims are expected today with the market looking for a dip down to 405k while for Durable Goods, the general forecast is 3.0%.
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