Like a rock tumbling down hill, oil prices have broken 40 dollars per barrel and sustained their downward momentum. Bearish reports ranging from the outcome of the OPEC meeting in Vienna over a week ago to supply outlooks from the International Energy Agency continue to weigh on the global crude market and have further dampening effects on global financial markets.
This past week in the markets set the scene for a diverging picture in terms of monetary policy in the United States versus the reset of the world. Through speeches and congressional testimony, US Fed Chair Janet Yellen made clear that a December rate hike remains on the table as the US Federal Reserve looks to lift off of rock bottom interest rates on December the 16th.
A lot is being made of remarks from Federal Reserve Chair Janet Yellen earlier this week and the likelihood of the Federal Reserve raising rates as early as December. This is because, all else being equal, the US economy no longer warrants emergency level interest rates. Fridays US jobs report added further evidence to this, and that in fact the lame payroll numbers of August and September look more to be anomalies than a slowdown of the US economy, which was immediately impacted by economic instability in Asia.
The three words in the title sufficiently describe the state of the globes financial markets. Although, directionless might be a little over optimistic given the S&P 500 is down nearly 6 per cent over the last 3 months and the yield on the US 10 year bond has moved from approximately 2.3 per cent to again below 2 per cent for the fifth time this year.
It has been 81 months, and counting. The US Federal Reserve has missed another opportunity to raise interest rates. Instead, Janet Yellen and her fellow committee members cited global economic and financial uncertainty, sidelining Fed policy for at least another month. The problem with the Federal Reserve’s decision Thursday, and in turn their decision making process is that it paves way for greater uncertainty.
August was the 80th successive month of the US Federal Reserve standing pat and not adjusting their key policy interest rate known as the federal funds rate. This Wednesday could mark the first rate move since December of 2008. As investors attempt to determine the actions of the US Federal Reserve, this “will they, or wont they” scenario has cast a cloud over the markets for the past few month as the US Fed readies themselves for liftoff.
On the 10th of August we witnessed the Peoples Bank of China decision to allow the yuan to depreciate for the first time in two decades. Brazil, the “B” in the sensation that was the BRIC economies tabled a budget this week that roiled the real, its currency, and sparked fears among investors that its debt would be relegated to junk status by credit rating agencies.
It may just be my natural bias, but it seems the “anti-gold bugs” have more animosity and emotion when expressing their views on gold then the gold bugs have in their excitement for the yellow metal. And there is absolutely nothing wrong with being bearish on gold at present time. Especially as the trend following the undeniable strength of the US dollar and chatter of the US Federal Reserve hiking interest rates gives little reason or evidence to go against consensus.
Make no mistake; the European Central Bank (ECB) has decisively been the game changer for how events are unfolding in Greece. The decision by the ECB to limit the emergency liquidity assistance provided to Greek financial institutions prompted the bank closures, which if they remain will have devastating and escalating effects on their economy.
Markets don’t seem to be overly obsessed with developments in Greece. I, however, continue to watch with absolute astonishment as the idea of a currency that was established only 23 years ago sees the potential of fracturing so quickly. With 10 days left in the month of June, key deadlines are quickly approaching for whether Greece can finalize a deal with their creditors and secure funding. Ongoing is the threat of the stability of their financial institutions with overnight lending from the ECB routinely being increased to support the outflow of customer deposits.
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