Equity markets finished a roller coaster week essentially flat. By midweek the markets were up nearly 70 basis points before collapsing 3 percent on disappointments from the European Central Bank who decided not to expand bond purchases. This also caused a plunge in the U.S. dollar as investors who were short the Euro in anticipation of this move. Then, Friday saved the week when the encouraging November jobs report pushed markets 2 percent higher and investors viewed this as confirmation a rate hike by the Federal Reserve next week is now a certainty. When all was said and done, the S&P 500 ended the week up just 0.1 percent, with the Dow Jones Industrial Average and NASDAQ Composite both gained 0.3 percent.
The Nail in the Coffin
The November jobs report from last Friday should put to rest the debate over whether or not the Federal Reserve is going to raise rates after its Open Market Committee meeting December 15-16. During the month of November, U.S. employers added 211,000 jobs which was above consensus expectations. Additionally, the two prior months were revised higher by 35,000 jobs. The unemployment rate remained at 5 percent and, importantly, wage expansion remained above 2 percent year-over-year growth. Another promising data point out of the release was the continued rise of the quit rate, or measure of those who voluntarily quit their jobs. This reached 10 percent, the highest level in four months. All of the boxes appear to be checked for Chair Yellen to begin hiking rates next week. And, while it seems like a foregone conclusion, we think investors should be mindful the Fed has moved the goalposts before and, just last week, almost every financial prognosticator was proven wrong when the European Central Bank did not expand its bond buying program.
Emerging Market Defaults on the Rise
According to Standard & Poor’s, corporate defaults in emerging markets are up 40 percent year-over-year and have hit their highest level since 2009. The default rate over the past 12 months is close to 4 percent compared to just 0.7 percent four years ago. The 4 percent also outpaces default rates for U.S. companies, which hovers around 2.5 percent. The increasing pace of defaults should be no surprise. The amount of emerging market corporate debt has quintupled over the past 10 years to nearly $24 trillion as investors have stretched for yield in a low rate world and companies were eager to borrow as their commodity-driven economies expanded. However, this has come to an abrupt end and the worst may be yet to come. According to the Institute of International Finance, more than $600 billion of debt matures in 2016. Even worse, some $85 billion of this is denominated in dollars. A rate hike by the Federal Reserve could continue pushing the dollar higher, making it more expensive to repay debt when slowing economic growth is crimping profit.
Renminbi Becomes a Reserve Currency
Early last week, the International Monetary Fund (IMF) added the Chinese renminbi to its basket of reserve currencies. It joins the U.S. dollar, the Euro, the British pound, and the Japanese yen in the basket known as Special Drawing Rights. The Managing Director of the IMF stated the renminbi’s inclusion is an important step but more financial reform is needed. Shortly after the decision, a deputy governor from the People’s Bank of China said the country would maintain a managed-floating system before gradually moving a free-floating currency. This allayed fears that China would move immediately to devalue the renminbi. The addition of China’s currency to the reserve basket is a testament to that country’s growth over the past decade. It now accounts for more than 15 percent of global economic output, up from just 5 percent nearly a decade ago.
Fun Story of the Week
A classic schoolyard insult is to bellow, “You’re slower than my grandma!” For Elvira Montes’ three grandkids, this is probably true. The 81-year old recently became the oldest finisher of the 2015 Beer Mile World Championship. The beer mile requires runners to chug a 12-ounce beer before each of the four quarter-mile laps around a track. She finished in just over 20 minutes, even beating her 47-year old daughter by 50 seconds. Mrs. Montes began running more than two decades ago, and this was her second beer mile. She plans to return to the world championships next year; her goal is to break 20 minutes.