U.S stocks, dollar’s strength and Fed’s interest rate hikes; we all have seen these keywords many times in the headlines of-late. Much has happened. $1 trillion dollar drained out from U.S. Stock markets. Dollar had a rough ride. Strengthened and then weakened. Janet Yellen handed over the position to Jay Powell as the new head of Federal Reserve Bank. Commodities were not immune especially due to headwinds in the realm of dollar. The markets seem plangent with whispers, arguments and discussions. Next month is going to be even noisier.
What were the important events? Consumer Price Index report was released in February,which showed an increase of 0.5 percent from last month. The annualized gain was 2.9 percent, fastest since 2011.Not to forget the Job’s Report (released first Friday of every month). Last month’s report, according to which U.S. added 200,000 jobs in the month of January, was very bullish and also one of the major reasons that caused the short-lived financial turmoil wiping of billions form the US stock market. Optimists euphemistically termed it as only a blip and a correction. But some took it as a warning. You decide.
The biggest event is going to be FOMC’s meeting (20th-21st March). The results, however, are expected. The Fed was already hawkish as we stepped into the New Year with an interest rate hike. What has changed? Nothing much. Instead of three, now there can be four interest rate hikes.
What are the concerns? The pace of these rate hikes. The level of inflation. That the U.S. economy might overheat. What’s fuelling these concerns? Read the above. Add to it the benevolent Trump administration cutting taxes and increasing spending.
What about the almighty dollar? Normally what happens is that under the explained scenario, increasing interest rates and growing economy, the dollar will strengthen. But it has been behaving incongruously. Why? There are many reasons. A podcast from Financial Times addressed the question in an incisive manner. The outlook for dollar remains bearish. Among other factors U.S. current account deficit and fiscal deficit remain “over-arching factors”. Albeit, Fed has been hawkish, as shown by its latest minutes of meeting, the fact that rate hikes have already been anticipated and dollar have appreciated significantly has shifted the focus from FOMC to what is ECB thinking these days. The podcast also mentioned that a shift of interest from U.S. equities, which are already mature and expensive, to European equities, considered underweight, is another factor that can contribute to a weakening dollar.
In simple words, one can say that on one side there is a concern for FOMC’s pace of increasing the interest rates which corresponds to the inflation level that in turn makes everyone panic. I think that caution that the recent stock market rout has introduced into the markets is a blessing. It is mostly when we are indifferent and haughty when a downturn takes us by storm. We should always be on our guard. These recent corrections were necessary. The best approach to tackle the markets in the coming month? One word: Caution.
Crude Oil: The story for Crude is more or less the same. However, a volatile dollar will definitely keep the markets interesting. U.S. shale production shows no signs of abating. Whispers of forming a Super group, in which Russia and Saudi Arabia will cement their camaraderie, are rife. We can expect oil prices to go up however not stay there. Many factors are at play that calls for a more practical approach to determine oil prices. The simple and logical argument can be that production cuts cannot be permanent solution to re-balance the market. Shale production is other side of the coin and we cannot ignore it. Even if the industry introduces some discipline in production and spending we should not expect that they’ll not take advantage of higher oil prices as a result of extension of the production cuts. This subsequently leads us again to that vicious circle we have always talked about.
Keyword for oil markets: Volatility.
Interesting times! Let’s stay in touch with the world.