Recap: Week Ending March 13, 2015

March 15, 2015

Equity markets traded much lower last week as the fact that a multispeed central banking system will soon be the reality. Multispeed refers to the notion that the United States Federal Reserve will be raising rates, and European Central Bank will start to lower rates. Such differences in policies can cause extreme moves in the market as each policy has different intentions. Since both the Fed and the ECB are two of the most powerful central banks in the world, the effects are even greater. This was seen to an extreme extent last week as the US Dollar gained extreme strength as investors flocekd to it to receive higher rates. On the flip side, investors and savers left the Euro as they sought higher rates and yields elsewhere. This move was seen in the currency markets last week as the Euro fell 3.21% vs. the USD. This move is extreme; especially considering it is in the FX market which does not see much volatility on a regular basis. The close Friday puts the Euro on multi-year lowers. The move lower to the EUR pushed the USD higher, which resulted in a move higher for the USD across the board. A strong USD sent the CAD down 1.38% to multi-year lows as well. The US Dollar Index, which tracks a basket of currencies traded against the USD, is currently trading at multi-year highs. Since June of last year, the index has seen almost a 25% rally. Such a push higher of this strength has not been seen in many years as the index has traded in a relatively narrow range for months. The USD Index is considered to be a currency benchmark for many traders across the globe showing the strength or weakness of the global currency, the USD.

The extreme moves in the FX market sent shivers through the equity market which usually runs fairly strong correlations with currencies. During normal times, it is common to see the USD have a negative correlation with equities listed in the US. This was the case last week as the NASDAQ 100 Index fell 1.92% . The move higher in the USD did send the price for bonds higher last week with the 30-year long bond trading up 2.15%. Gold commonly holds a negative correlation with the USD as a move higher in the currency indicates deflation, and gold is considered to be a hedge against inflation by many. Taking this into consideration, a move lower in gold last week was not unexpected. Last week gold traded down to $11.46.80 before closing the week out at $1158.40, closing down 0.84% on the week. The biggest loser on the week was US crude oil. As mentioned earlier, a strengthening USD indicates deflation, which in turn means prices may fall. As crude is priced in USD, it tumbled as the currency which it is quoted in caught a bid. Last week crude had one of its worst weeks of 2015, closing down $4.78 or 9.6%. The move lower pushed what many call black gold to close Friday at $45. The last time the energy product traded down to this price was at the end of January where it bottomed at $43.58. As the case with crude, many agricultural products priced in USD fell as well last week. Both corn and soybeans fell on the week, closing down 1.49% and 1.66% respectively.

The move in both the EUR and USD comes as the full effects of their central bank’s monetary policies are not yet fully implemented. Taking this into consideration makes one wonder that the full implications of the policies will have on the market when they are actually implemented.

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