Last week was literally a carbon copy for all of 2015 as energy prices continued to dominate all other market-moving news items. While rebounding High Yield Bond prices and comfort surrounding the first Fed rate increase in several years were guiding Equities higher, it only took new lows in crude oil and natural gas to reverse all the early week gains. So if you are looking for market guidance into year-end, keep oil and gas prices at the top of your watch list for the answer.
So the Fed finally raised rates for the first time in 7 years.
Why the increase?
- “A range of recent labor market indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year.” (FOMC statement)
- “With inflation currently still low, why is the Committee raising the federal funds rate target? As I have already noted, much of the recent softness in inflation is due to transitory factors that we expect to abate over time, and diminishing slack in labor and product markets should put upward pressure on inflation as well. In addition, we recognize that it takes time for monetary policy actions to affect future economic outcomes.” (Federal Reserve Chair Janet Yellen)
And the Fed voters remain very aggressive on forward rates. Much more so than the market is implying.
But once again, nothing else matters besides the market prices of energy molecules (N:UNG) which remain under pressure from too much supply and soft global demand.
The U.S. Government Budget boost to Alternative Energy incentives also doesn’t help.
The clean-energy boom is about to be transformed. In a surprise move, U.S. lawmakers agreed to extend tax credits for solar and wind for another five years. This will give an unprecedented boost to the industry and change the course of deployment in the U.S.
The extension will add an extra 20 gigawatts of solar power—more than every panel ever installed in the U.S. prior to 2015, according to Bloomberg New Energy Finance (BNEF). The U.S. was already one of the world’s biggest clean-energy investors. This deal is like adding another America of solar power into the mix.
(Bloomberg)
Interesting that falling energy and a rising US dollar had little negative impact on Emerging Market equities:
And very disappointing to Equity investors, it was the most interest sensitive and defensive sector of Utilities which led on a week where the Fed raised rates:
Junk Bonds remained in the spotlight last week. Even Janet Yellen addressed it in her post meeting forum:
“Third Avenue Focused Credit Fund was a rather unusual open-end mutual fund. It had very concentrated positions in especially risky and liquid bonds, and it had been facing very significant redemption pressures” (Federal Reserve Chair Janet Yellen)
Many retail investors prefer the sidelines right now as flows show significant redemptions in all credit bond funds.
Investment grade bond funds in the US have been hit with a record wave of redemptions, a week after two high-yield funds announced they would shutter and another barred withdrawals as the credit market showed further cracks.
Investors withdrew $5.1bn from US mutual funds and exchange traded funds purchasing investment grade bonds — those rated triple B minus or higher by one of the major rating agencies — in the latest week, according to fund flows tracked by Lipper.
The figures, the largest since Lipper began tracking flows in 1992, accompanied another week of $3bn-plus withdrawals from junk bond funds.
(FinancialTimes)
Even Institutional Investors have increasing concerns over credit in a rising rate environment:
Here is an extreme data point, Junk Bond volatility now exceeds Equity volatility:
@DriehausCapital: One month vol in N:HYG > N:SPY vol for first time since 2008.
Some came to the defense of the overall credit market.
“The Third Avenue situation is unique,” said Gary Cohn, president of Goldman Sachs, who has been in frequent contact with clients throughout the week. “They owned really low-credit-rated products compared to the typical high-yield fund. The long-term impact of rising rates remains a big question mark. But no one thinks that the collapse of Third Avenue is going to contaminate the world.”
In part that’s because today’s junk bond market — and the institutions that invest in it — lack two important ingredients of past crises: high leverage (heavy borrowing to finance the purchase of assets) and concentrated bets. While Third Avenue’s portfolio was concentrated in thinly traded, obscure bonds, it had no leverage. Its failure didn’t put any lender in peril, the way the collapse of Lehman Brothers led to crises at A.I.G. and throughout Wall Street.
(NYTimes)
Meanwhile, the biggest supporters of Commodities are losing their investors.
Duncan Letchford, the CEO Galena Asset Management, a subsidiary of Trafigura, writes:
“Overall 2015 was a difficult year for commodity-related hedge funds. Commodities were in a bear market, with prices of oil, precious metals and industrial metals and minerals showing structural weakness almost across the board. In addition to year witnessed the closure or withdrawal from the market of a number of notable hedge funds and more generally of the banks’ proprietary trading arms. As a consequence the market became noticeably less liquid and more difficult to trade.
“In effect, we have seen a sea-change in investor attitudes. From the mid-2000′s onwards, commodities came to be seen increasingly widely as an investable asset class. This perception has now largely unwound, to be replaced by a [generalized] aversion on the part of institutional investors towards the segment as a whole. We estimate that the total assets under management (AUM) in the top 10 commodity funds globally have fallen from more than USD50 billion in 2008 to less than USD10 billion today.”
(BusinessInsider)
But not all bad for those touching Energy. Carnival Cruise Lines (L:CCL) loves plunging Oil: Revenues/Unit +4.1% and Costs/Unit -10.7%…
(@Financial_Orbit)
And so lots of education these days for Credit, Commodity and Equity investors.
There is one person working harder than Santa Claus this month:
Keep an eye on the new President of Argentina, Mauricio Macri who is up to good things in his first 10 days:
- Let the Argentinian peso float
- Brought in a U.S. trained economist to run the Central Bank
- Cut personal income taxes, raised export taxes
- Got Int’l Banks to agree on a $5b loan
- Brought in statistics geeks to help gather economic data
- Firing up two new Supreme Court justices
- Meeting with top Argentinian creditors
Self-driving cars, very very soon:
Google Inc (O:GOOGL). plans to make its self-driving cars unit, which will offer rides for hire, a stand-alone business under the Alphabet Inc. corporate umbrella next year, a person briefed on the company’s strategy said.
Google’s autonomous vehicles have logged more than 1 million miles (1.6 million kilometers) on public roads, mostly around San Francisco and Austin, Texas, making these cities logical places for launching a service, said the person, who asked not to be identified because the plans are private. The fleets – which would include a range of large and small vehicles – could be deployed first in confined areas like college campuses, military bases or corporate office parks, the person said.
(Bloomberg)
40% of the market is a massive blow to the non-self-driving car manufacturers.
@KCAndersson: Only 40% of adults in the US can see themselves buying a self-driving car in the future #FordTrends
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