Last week was the most significant week in regards to the currency markets, the stock market, the bond market and the energy markets. All of these markets were directly impacted by the events which were relayed via the news. Additionally, another significant week will be when the FED meets on December 15th and 16th, 2015, in order to make a decision on their lift off of a new short-term interest rate hike (before the holiday season commences). It appears, as though, we will finish the year off with a bang and with plenty of volatility. So, why was this last week so significant, and why did it lead to such large volatile movements within the respective markets? This article will shed light on the reasons why.
The ECB Meeting on Thursday, December 3rd, 2015The first significant event of the week was the ECB meeting, which occured on Thursday, December 3rd, 2015. The three charts displayed below, indicate the kind of volatility and the impact that the ECB Presidents announcement had on the markets.
Reasons for such large moves:With dovish comments made by the ECB President, within the last few weeks, the markets were expecting something BIG from the ECB! However, the ECB President brought a “smaller bazooka”, which spooked the markets. “Super Mario”, a nickname assigned to him, due to his history of meeting and exceeding expectations of earlier occasions, surprisingly, could not meet market expectations, this time around. The dissidence during the meeting, also spooked the observers, which indicates the limited freedom that Mr. Draghi has for the future.
The ECB President announced the following measures: Extended monthly bond purchases:The ECB did not increase the amount of its bond purchases per month from the existing €60 billion, but instead extended its duration of the QE program, by an additional six months. This announcement was considered below expectations of the marketplace. The market was anticipating an additional amount of its current monthly QE as well as a further extension of the QE.
Reduction of official discount rate by 0.1%The markets expected the discount rate to be pushed further into the negative territory so as to discourage the banks from “parking” their money with the ECB. The expectations were to the tune of a 0.2% reduction, which would have brought down the effective rate to -0.4%. However, the ECB announced only a 0.1% reduction. The Street was disappointed. Other measures of diversifying its purchases include bond purchases of local and regional government debt, reinvesting proceeds received from matured bonds and no plans to ration liquidity until the end of 2017. These announcements were not received well and caused a global market sell off. The US Dollar- Euro parity will have to wait for a future date.
The US jobs report on Friday, December 4th, 2015:After the disappointment of the markets, due to the ECB measures, the next significant event was the US jobs report released on Friday, December 4th, 2015. This is critical data as it forms a part of the dual mandate of the FED. With the FED due to meet on December 15th and 16th, 2015, and the Chairwoman having raised expectations of the first rate hike in almost a decade, this is going to be a keenly watched jobs report. Though Chairwoman Janet Yellen reiterated not to read too much into this report, the market participants thought otherwise. The non-farm payrolls came in at 211,000 against an expected 200,000. The figures of the last two months were also revised upwards by a combined total of 35,000. The unemployment number remained at a low of 5%. The hourly wage increase was 0.2% in November 2015, and over the year, the wages increased by only 2.3%. The data showed the strength in the US economy, which remained unaffected by lower energy prices and the economic slowdown in China. The hope of a stronger economy buoyed the stock markets higher, by more than 2%, on Friday December 4th, 2015.
Looking Forward:The interest rates have remained at record lows for a very long time. The effects of the interest rate hike on the economy will be known in a few months, which will decide the trajectory of further rate hikes and the movement of the stock markets.
The OPEC meeting on Friday, December 4th, 2015:With energy prices reeling near their lows, it was expected that OPEC would support the prices with a production cap. Many OPEC nations are reeling under pressure due to subdued crude oil prices. OPEC has not reduced their production as they want to maintain their market share and expected the other non-OPEC major producers like the US and Russia to cut their production. With no reduction in output by either the OPEC, the US or Russia, an excess supply compared to the consumption, may lead to a shortage of space to store crude oil, in the future. There was an unconfirmed divide in the OPEC member nations with Saudi Arabia and Iran at opposing ends. Iran, which will restart supplying oil after the lift off of the Western sanctions, is keen to ramp up its production in the next few months. With non-OPEC nations supplying almost two-thirds of the worlds demand of crude oil, a small reduction by the OPEC nations is unlikely to have any lasting effect. The members could not arrive at any conclusions, and no formal announcement was made after the meeting on Friday, December 4th, 2015.
Looking Forward:With US shale oil pumping at record levels, the power of the OPEC nations, which are led by Saudi Arabia, seem to be reducing. Additionally, pumping by Iran, in the near future, may keep the upside capped. I expect crude oil prices to fall further to $30/barrel.
Conclusion:The world is going through a major shift, which will create historic opportunities for unprecedented profits to be made in our lifetime, beginning in 2016 and beyond. Energy prices will continue to carve out a bottom in 2016. Meanwhile, the FED is about to raise rates, Europe is increasing its QE, China’s growth is under the scanner and Japan is not able to generate growth, even with Abenomics. These are extraordinary circumstances, which require extraordinary actions from both the investors and the traders in 2016.
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[Image Courtesy of Wikipedia]