Recap: Week Ending December 18, 2015

December 20, 2015

For the first time in almost ten years, the United States Federal Reserve raised its target interest rate last week. The rate is currently targeted to trade between 0.25-0.50, an increase from the previous range of 0-0.25. The move higher in rates is the first since the great recession and is considered by many to be a sign of an improving economy. Leading up to the announcement stocks were very volatile, however, traded higher. The upside activity continued immediately after the announcement, however, in days following equities sold off. Overall, markets closed the week lower with the Dow Jones Industrial Average leading the way down. Last week the Dow finished lower by 0.79% to close Friday at 17,128. The S&P 500 was the best performing index in the United States, closing the week down only 0.34%. Even though the markets showed a some amount of volatility following the interest rate decision, much more volatility could have been seen if such a decision was not as clearly communicated as this one was. In the days and weeks leading up to the announcement members of the FOMC voting committee made their intentions clear and, as a result, markets very accurately priced in the interest rate shock. Last week the ten year US Treasury Note traded higher by 2.81% to settle the week with a yield of 2.199%. The move higher in yields is a direct reflection of the move higher in interest rates. A move higher in rates signals for bond prices to move lower. It must be remembered that bond prices and yields move in inverse directions. The lack of volatility in the bond market without a doubt provided comfort for equities. The next step is predicting the number of hikes that will occur next year. The Federal Reserve is hinting at one increase every quarter in 2016, totalling four hikes. With this being said, the interest rate derivatives market is currently pricing in only two rises in the 2016 calendar year. A decision in regards to the next move in interest rates will come as the Fed observes how the market reacts to higher rates. Furthermore, volatility, displayed in the CBOE VIX Index trade down 15% last week, providing more of a notion that the market absorbed this interest rate shock with little to no problems.

 

The Toronto Stock Exchange Composite Index, or TSX, was the real winner last week, closing up 1.83% to settle on Friday at 13,024. The move higher in the Canadian equity benchmark index is the first three weeks. The move higher in the TSX comes as the price of NYMEX crude oil traded to new multi-year lows breaking below lows set last week. The new low is $34.43. In recent weeks, the TSX has been beaten down by an extremely weak price of crude. Like crude, gold has been on a tumble in recent months as a weak commodity complex continues to dominate the news. Gold is considered by many to be a hedge against inflation. Such downside activity in gold can be attributed to the notion that a move higher in rates will slow any inflation in the economy. With this being said, the Fed has hinted that the current levels of inflation in the economy are not where they would like them to be. As a result, a rally in the price of gold might occur. Such a notion has yet to be seen in the market as the price is currently trading at multi-year lows. From a technical analysis standpoint, the RSI, which stands for Relative Strength Index, is currently trading at 45 on the daily time frame. This is an interesting observation as the price is currently trading near lows. Readings below 30 are considered oversold while readings above 70 are considered overbought. With the index currently diverging from the price of gold, one must keep an eye on the RSI to see if it is signalling an upcoming rally or if it is providing a false signal.

 

Merry Christmas and Happy Holidays from the DeGroote Trading Centres Team!

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