After the Cut: Markets Price the Next Move

Most people have seen “The Wolf of Wall Street” and walked away shocked by how crude and excessive it felt.

But what’s really fascinating is that nearly everything outrageous in the film was actually toned down; a movie famous for excess is still a sanitised version of reality, with scenes removed or softened simply because the truth would have felt unbelievable. Greed can show a side of mankind which is simply too ugly to believe. At its core, it shows how human incentives, ego, and crowd psychology routinely overwhelm red lines of civility and restraint long before anyone steps in to stop the process. 

A version of that dynamic played out earlier this week on the geopolitical stage, a reminder of how thin the line is between authority and excess when accountability fades.

Oil Spikes, but bearish

Currently, Brent prices spiked due to potential Venezuela supply restrictions. But, Venezuela currently produces only around 900,000 bpd, far too little to create an immediate supply shock in a wet global market where demand is running near 105m bpd. However, with 2026 likely to begin with a 3.8m bpd supply glut after a sharp fall in Brent during 2025, markets are likely to increasingly price the risk of incremental Venezuelan barrels into longer-dated contracts, adding downside pressure beyond the $50–52 year-end targets flagged by Goldman Sachs and Bank of America.

Pakistan Interest Rate Outlook:

While few people anticipated the 50 bps rate cut by the MPC, the market is now looking for a 50-100bps rate cut as they expect the Central Bank will undergo another rate cut cycle. 50 bps is already priced in as cut-off yields have dropped by 84 bps and 111 bps on 6 and 12 month paper post the last policy rate cut. This may feel excessive, but is based on two key premises: 1). expectations of two Fed rate cuts in 2026, and 2). a tamed inflation outlook. Inflation for December clocked in at 5.6% versus 6.15% in November. Where as the outlook for current quarter is around 6.3%. 

KSE100:

The fresh rate-cut cycle has provided a boost to the otherwise lacklustre December period for the KSE-100, which has jumped nearly 10,000 points in the first 10 days of 2026.

FX Outlook:
December remittances came in strong at $3.58bn, up 12.5% m/m, reinforcing that external stability continues to rest less on exports and more on resilient inflows from overseas Pakistanis. At the same time, reserves rose by $180mn. The latest liquidity profile of the SBP shows aggregate short positions of less than $2bn, broadly in line with the IMF’s target, and suggests that reserve accumulation has not been driven by buy-sell swaps, but mopping up of excess liquidity from the interbank market.

The current trajectory implies a potential breach of the 280/$ level; however, with REER at 104.8, competitiveness already appears stretched, and keeping this in mind, the central bank should resist the temptation of a decisive break below 280/$, preferring stability over signalling strength, particularly as import demand gradually recovers and longer-dated external pressures remain unresolved.

For now, USDPKR is likely to remain range-bound, with two-way movement increasingly coming into play.

US Dollar: Safe-Haven Bid Returns:

The US dollar has regained support after a period of weakness, driven by a renewed risk-off tone following geopolitical developments around Venezuela, a sharp rise in US unemployment to 4.6%, and a growth scare triggered by Brent crude slipping below $58. While markets continue to price Fed rate cuts in 2026, the dollar is once again benefiting from its defensive role, particularly as global growth expectations soften and equity volatility rises. This suggests the recent dollar bounce is less about rate differentials and more about capital preservation, a dynamic that could persist into early 2026.

In the end, markets fail for the same reason characters in The Wolf of Wall Street did, because greed runs ahead of morality