Market Outlook | December 15, 2014

“Uncertainty and mystery are energies of life. Don't let them scare you unduly, for they keep boredom at bay and spark creativity.” (R. I. Fitzhenry)

Current Landscape

On one end, opportunistic traders are tempted to buy the "cheaply valued" oil related investments. Meanwhile, macro observers are baffled by the pace of oil deceleration, dollar acceleration and uncertain ripple effects on oil-rich nations. Stock markets are debating and digesting oil impact on indexes, while the Central bank chatter remains top priority. Headline writers are hammering the dramatic oil decline and market sell-off fear lingers. For others, the sell-off from mid-October is still mysterious and leaves them waiting for clues. Equally, the emerging markets (EM) woes of 2013 and the Eurozone 2011 crisis are being revisited. Interestingly, the current market narrative includes prior dangers that were short-lived in the recent past. Nonetheless, the fundamental concerns (i.e. supply-demand dynamics) find a way to reappear and the unsolved concerns do not evaporate. Thus, the Fed’s magical power is being questioned as volatility is slowly resurfacing.

Echoes of Panic

Last week’s trading pattern implies that global investors woke up from comfort or an illusionary status. From Greece to Dubai markets, most global markets witnessed aggressive sell-offs and increasing volatility. Brazil and Russia hiked interest rates to stabilize their economies. Interestingly, the increase in rates comes in a period where the status-quo is deeply engraved in low interest rates and low inflation climate. Surely, US interest rate decision is geared to have bigger implication on currencies and bond markets. Already the rising dollar, along with decline in commodities, hurts emerging economies, which have been reflected since last year.

“Governments borrowing abroad in dollars (and frequently also pegging the currency to the greenback) were hit by an increase in local currency liabilities when the dollar rose.” (Financial Times, December 10, 2014)

Some of the worries looming are similar to the Eurozone crisis of 2011 where perceived risk began to reawaken. In terms of fixed income, the Greek markets were warning of danger—yet again.

“The yield on Greek 10-year bonds has surged about 200 basis points this week, the biggest leap since the height of the euro-area sovereign-debt crisis in May 2012. Worse still, the yield on three-year notes, issued in July as part of Greece’s emblematic return to capital markets, have jumped more than 450 basis points, climbing above the longer-dated rates in a sign that investors are increasingly concerned the nation will be unable to pay its debt.” (Bloomberg, December 12, 2014)

The global housing market, from China to Southern Europe to Brazil, suggests another sign of near-term trouble. Momentum is slowing across EM in terms of housing. In fact, even the Canadian market could be peaking, too. Thus, the warning signals are not only from stock or currency markets. Now, the housing “bubble-like” traits are confirming the ongoing concerns of EM.

Well-being Examined

In the US, there is this feeling of improving economy and optimism for consumers given the lower gas prices. Yet week after week the status of the middle class is not just a political chatter, but a practical macroeconomic concern. For months the so called disconnect between record stock markets and tangible economy has been debated ad nauseam. Now, in looking ahead and in terms of an upside, some wonder if the real economy is in better shape than the stock market.

Certainly, the US financial markets remain relatively attractive considering the dollar, treasuries and stock markets. However, consumer trends are mixed, but overall perceived as a net positive. Surely, the US economy, in terms of jobs and housing value, appears attractive— especially versus Eurozone and EM. That’s clearly defined in sentiment indicators. However, the well-being of the US economy might be appealing by some measures, but wage and small business growth are not overly stunning. Further evidence is awaited by the Fed and by the eager market that’s obsessed with interest rate policies. Surely, the anticipated FOMC this week should shed more light on this and that will help redefine the suspenseful script.



Article Quotes:

“France is sliding into a deflationary vortex as manufacturers slash prices to keep market share, intensifying pressure on the European Central Bank to take drastic action before it is too late. The French statistics agency INSEE said core inflation fell to -0.2pc in November from a year earlier, the first time it has turned negative since modern data began. The measure strips out energy costs and is designed to “observe deeper trends” in the economy. The price goes far beyond falling oil costs and is the clearest evidence to date that the eurozone’s second biggest economy is succumbing to powerful deflationary forces. Headline inflation is still 0.3pc but is expected to plummet over the next three months. French broker Natixis said all key measures were likely to be negative by early next year. Eurostat data show prices have fallen since April in Germany, France, Italy, Spain, Holland, Belgium, Portugal, Greece and the Baltic states, as well as in Poland, Romania and Bulgaria outside the EMU bloc. Marchel Alexandrovich, from Jefferies, said the number of goods in the eurozone’s price basket now falling has reached a record 34pc.” (The Telegraph, December 11, 2014)

“And earlier this week, the U.S. Congress voted to impose sanctions on Venezuelan officials found to have violated the rights of political protestors during the demonstrations that began last February. That political unrest continues, most recently reflected in the indictment of opposition politician Maria Corina Machado over an alleged plot to assassinate the president. All of this is unfolding in the context of Venezuela’s rapidly shrinking foreign reserves, a reality that has been exacerbated by this year’s 38 percent decrease in oil prices—a five-year low. As of Monday, December 8, they had fallen below $67 per barrel. And Morgan Stanley cut its 2015 forecast, predicting that prices could average as low as $53 per barrel in 2015 (down from an earlier estimate of $98). Venezuela in particular faces interesting challenges with this price drop, as its national income dwindles and its economy slowly grinds to a halt. Among the largest global producers of oil, Venezuela has the largest reserves in the world (totaling something in the range of 300 billion barrels of crude oil). Oil comprises some 95 percent of Venezuela’s total export earnings. And given the political instability and economic stagnation the country already faces, the International Monetary Fund (IMF) estimates that the Venezuelan government requires an average prices of about $120 per barrel of crude oil to balance its budget.” (CSIS, December 11, 2014)



Levels: (Prices as of close: December 12, 2014)

S&P 500 Index [2,002.33] – Retraced from December 5th highs of 2079.47. Still above the October 15th lows of 1820.66. Interestingly, the 50 day moving average stands at 2000, which has proved to be a key psychological level.

Crude (Spot) [$57.81] – Over a 45% drop since June 2014 highs highlights the pace of price deterioration. As some expect, stabilization around the $60 range; however, others will point out the lows of 2008, which stood at $32.40.

Gold [$1,209] – Once again around $1,200 proves to be a potential bottom in the last two years. Yet, the upside momentum has not been overly convincing as the 200 day moving average is $1,269.31.

DXY – US Dollar Index [89.33] – Signs of stability around and above 88. This shows the uptrend is intact.

US 10 Year Treasury Yields [2.08%] – The dramatic decline in yields continues as signs of the rush for safety are mixed with ongoing rate expectations. Annual lows of 1.86% set two months ago do not seem too far off.


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