Recap: Week Ending December 11, 2015
Markets sold off with conviction to the downside as an aggressive offer hit global equities. The S&P 500 and NASDAQ 100 set the tone in the United States settling the week down 3.79%. The Dow Jones faired a bit better, finishing the week down 3.26%. The strong move to the downside comes as the Federal Reserve is expected to raise rates this coming week. This will be the first hike in the United States Federal Funds since the great recession and is eagerly anticipated by all market participants. Many feel that when interest rates rise the buying in equities will shut off as the stream of cheap money of low-interest rates will be cut off. However, it must be noted that a rate hike signals that the economy is strong and healthy, and, in theory, no reaction should occur if the timing is correct and companies are able to absorb the shock adequately. With this being said, the reaction was mixed across markets. An interest rate rise is commonly matched by a fall in the price of bonds; however, last week the price of bonds rose, and yields fall. Bond prices and yields have an inverse relationship. The 10 Year US Treasury Note, which is industry benchmark finished 5.98% lower last week, settling at 2.284% on Friday. The current level seen in yields hadn’t been witnessed since October of this year when yields traded in a prolonged sideways chop like pattern. This sense of contraction makes one wonder if a rate hike will occur or if the markets are not working in tandem. If a rate hike does not occur even more volatility will be seen as the markets will have to readjust as many major securities are currently pricing in a rate hike. According to Bloomberg, the probability of a hike this week is in the 80% region indicating that there is a strongly likelihood of such an even happening. The selling last week was not strictly limited to the equity space.
Last week the price of Light Crude at the NYMEX slipped $4.78 or 11.91% settling Friday at $35.36. The move lower was one of the strongest on a weekly basis that the product has seen this year. This leg lower in crude puts prices below the lows made this past summer and sends us back to the lows that were established in early 2009. The sell-off in crude remains a mainly a story of output as OPEC continues to operate without production limitations. Many of the OPEC countries are attempting to push higher costing crude operations offline with cheaper oil prices. Such members feel that it will soon become uneconomical for high-cost oil operations to function with the price of crude being so low resulting in shrinking profit margins. Currently, many wells in the United States are sitting dormant as owners can afford to pay debts, however, are unable to finance further extraction operations. With no limits on production paired with weak demand, prices continue to tumble. The extreme action in crude has had severe effects on the Toronto Stock Exchange Composite Index, or TSX, which fell heavily last week. In trading last week, the Canadian benchmark equity index fell 568 points or 4.26% to settle the week at 12,789. As many of the companies on the TSX are energy related, lower prices signal weaker business operations and revenues. The bleeding was not only limited to equities as the Canadian Dollar suffered heavily last week. In trade last week, the CAD fell 2.85% to settle the week in the 0.73 range against the USD. The move lower in the CAD is a combination of a weak price of oil as week as a looming hike in the Fed Funds rate. A higher rate in the United States will cause the USD to gain strength as investors and savers from around the world will flock to the USD to seek higher returns on deposits.