1. U.S. Interest Rates and the Federal Reserve
The end of 2015 brought the Federal Reserve’s first fed funds rate hike in years. Federal funds went to a whopping 0.25% to 0.50% target range, more than accommodative. At the end of 2015 and the start of 2016, the Fed presidents were out in droves jawboning that the Fed was eager to raise rates to a level of normalization. There was even a telegraph of four rate hikes coming for 2016. Then the international markets hit the skids, along with the U.S. markets, and the Europe and Japan turned on more QE. And then came the recession fears.
All of a sudden, Team Yellen has had to tone down the rhetoric, and even cited international concerns on more than one occasion. In fact, many economists now believe that the Fed’s dual mandate of proper inflation checks and full employment may have a third mandate: international financial market stability. Negative rates in Japan and Europe did the Fed’s tightening on a relative basis. Now Fed Chair Janet Yellen is telegraphing only two rate hikes for 2016, and the fed funds futures market at the CME is not even pricing in a 0.75% certainty until sometime in 2017.
2. Quantitative Easing Overseas (or Here)
Having the U.S. Federal Reserve on Hold is one thing. There are other forces at work in the global economy. Japan and Europe both are now trading with negative interest rates. They are also buying more securities and debt than what was originally expected. Europe has even moved to effectively incentivize banks to lend, in an effort to avoid or at least mitigate the notion that negative borrowing rates are nothing more than a tax on savings and a tax on bank reserves.
QE is viewed with very mixed emotions, and very mixed ratings, by economists and analysts alike. The Fed did admit that it discussed negative interest rates, but it has said on multiple occasions that negative rates are not coming to America. Yellen even questioned if it was within the confines of the Fed’s ability. Taking rates into negative territory even acted as a relative Fed rate hike here, again limiting the Fed’s ability to hike. QE to negative rates has posed asset bubble risks for three nations in Europe.
3. Oil Prices and the Oil Patch
Humans have to have water to live, but the world still needs oil and fossil fuels to operate. Oil started to slide in 2014, then fell in 2015, and fell some more, and then fell beyond normalcy. In 2016 oil went so low that benchmark West Texas Intermediate crude oil was under $30. Oil became so cheap that most nations and companies drilling would be doing so at a loss or at virtually no profits. Despite Iran coming back on line, and despite Russia and Venezuela needing to sell oil for cash regardless of the price, it seems that the larger players in OPEC may have finally blinked. Putting the U.S. frackers out of business was a real goal, which at least partially succeeded, but it does no good to drive prices down so much everyone loses.
Now, even Goldman Sachs has raised its floor for 2016 and beyond in a move that may have further marked a bottom. With oil back at $40, investors need to keep in mind that the oil business is not going back to the old normal any time soon. Oil patch workers are still being laid off and capital spending plans are still pointing lower rather than higher — even if Chevron Corp. (NYSE: CVX) declared war by committing to keeping and ultimately raising its dividend, even if it has to borrow. The other consideration that likely will not change is that oil company bankruptcies and debt defaults will continue, as too much damage was done.
4. Metals and Commodities
Metals and commodities are often used as a key barometer of the global economy. It takes metals and commodities to make everything – planes, buildings, bridges, electronics, cars, solar panels and so on. This ties very closely to energy (oil), but such is life. Steel, gold, tin and copper have all recovered. Whether it is just a money trade or asset allocation change remains up for debate, but the moves have been massive.
Even copper, which can easily be measured by the iPath Bloomberg Copper SubTR ETN (NYSEMKT: JJC) was up 8% year to date at $26.64 — but that is up just over 20% from the low of $22.04 in early January. Copper (in a duel with steel) is deemed the world’s leading indicator metal. QE and negative interest rates, plus fears of large cash bills being removed, has even driven gold to what will be a great quarter. The SPDR Gold Shares (NYSEMKT: GLD) was up almost 18% year to date as of March 18, and gold itself was back up at $1,255 per ounce.