New Threat for Oil Prices

Haidar Mohammed Ali/Agence France-Presse/Getty Images

For most of its history, oil has flowed in one direction: from developing nations, where it is produced, to industrialized nations, where it is consumed. That pattern no longer holds true, and the shift could produce another economic force weighing on global oil prices.

Oil prices have plunged since mid-2014 amid global oversupply, with U.S. prices falling $1.75, or 5.9%, to $27.94 a barrel Tuesday on the New York Mercantile Exchange.

Emerging markets have accounted for the majority of global oil consumption since 2014, according to the International Energy Agency. Demand from developing countries amounted to slightly more than half of the 95 million barrels a day consumed in the fourth quarter of 2015.

The shift marks a reversal after decades when the U.S. and other developed nations in the Organization for Economic Cooperation and Development dominated demand.

With producing nations in the Middle East, Latin America and elsewhere responsible for a bigger part of the consumption pie, lower oil prices could spark a vicious circle in which demand falls along with prices as the value of those countries’ exports declines, weighing on economic growth.

“The emerging markets are largely commodity-based markets,” said Richard Soultanian, co-president of energy-consulting firm NUS Consulting Group. “With the enormous stress they’re undergoing as a result of the broader commodity slump…it’s hard to find any pockets of significant demand.”

The main concern has been weaker economic growth in China, which is responsible for much of the oil demand in emerging markets. But other oil consumers in the emerging world also are pulling back amid sluggish global growth. In the Mideast, some countries have cut gasoline subsidies as revenue from oil exports dwindles, which could curtail consumer demand there.

Economies in Brazil and Russia, both oil exporters, shrank in 2015, and their oil consumption fell as well. Unexpectedly sluggish growth in emerging-market economies would be a major obstacle to oil prices rebounding, analysts say.

“Demand concerns are everywhere,” said Harish Sundaresh, portfolio manager at Loomis, Sayles & Co., which manages $229 billion.

As for supply, many analysts forecast the oil glut that sent prices sliding in mid-2014 could ease by the end of 2016. Output in the U.S. and other regions is expected to slow this year, allowing bloated inventories to start shrinking.

But many analysts say demand growth this year is difficult to predict. If consumption comes in lower than expected due to weak economic growth, particularly in emerging markets, any oil-price recovery could be pushed to 2017 or later, they say.

“The race is between decelerating supply and decelerating demand,” said Bill Herbert, analyst at Simmons & Co. International. “Everybody is 95% focused on supply.…But we’ve got demand slowing as well.”

Simmons recently cut its global oil-demand growth forecast for 2016 to 800,000 barrels a day, which would represent a 0.8% growth rate. That is below widely watched forecasters IEA and the U.S. Energy Information Administration, which expect demand to grow 1.2 million and 1.4 million barrels a day, respectively.

Trading house Vitol expects demand growth between 800,000 and one million barrels a day this year, said Christopher Bake, a member of the company’s executive committee, at International Petroleum Week in London on Tuesday.

“I don’t think we can rely on low prices driving much incremental demand from this point,” Mr. Bake said. “A lot of…demand destruction has occurred in the commodity-based economies.”

Low oil prices historically have boosted demand as cheaper prices for gasoline and other fuels have encouraged consumers and businesses to spend more.

U.S. oil prices already are down 25% this year, which some analysts say could spur more demand. But demand growth has slowed in recent months, sparking concerns that low prices are no longer encouraging more buying compared with a year ago, when prices already had fallen significantly. Global consumption grew by 800,000 barrels a day in the fourth quarter from the prior year, according to the IEA, a 64% drop in the growth rate from the third quarter.

“At $40 oil [or lower], you are not going to get the right amount of demand. You will get way too much demand,” said Francisco Blanch, head of global commodities research at Bank of America Merrill Lynch.

Part of the fourth-quarter slowdown was due to warm weather in the U.S. and Europe, which limited heating-oil consumption. But the IEA also blamed “weakening macroeconomic conditions in China, Brazil, Russia and other commodity-dependent economies,” according to its January report.

Unlike in developed nations, where cheap gas prices encourage drivers to take road trips or buy larger vehicles, lower oil prices don’t necessarily translate into cheaper fuel costs in emerging economies. The IEA in January said because some subsidies that had lowered what consumers paid in Saudi Arabia and other Middle Eastern countries have been cut, the agency expects oil demand in the region to grow more slowly this year. In other countries, a weakening currency has undercut savings from lower oil prices.

A surge in the developing world’s oil consumption boosted energy prices in recent years. China’s robust growth helped drive a decadelong rise in commodity prices in the early 2000s, and the country still accounts for more than one-tenth of global oil demand.

But some analysts warn that as China moves from a manufacturing to a service-oriented economy, it could consume less oil.

Michelle Stevens, senior portfolio manager at Baird Investment Management, which manages $3.5 billion in assets, eliminated her funds’ exposure to energy companies after China devalued its currency in August, she said.

“As the yuan devalues, the dollar will rise and…commodity prices, especially oil, are going to fall,” she said.

Written by Nicole Friedman of The Wall Street Journal 

(Source: The Wall Street Journal)

Chart of the Week: February 2, 2016

Screen Shot 2016-02-02 at 4.35.58 PM

Real U.S. economic growth slowed to an annualized rate of 0.7% in 4Q15, but with consensus estimates of 0.8%, this report did not come as a surprise to markets. Expectations leading up to the report were for slower growth due to the familiar headwinds of low commodity prices, an inventory overhang and a strong dollar. Each of these came to pass, as shown in the chart. Business investment, for example, detracted 0.2% from growth this quarter, as investment in mining and oil exploration structures decreased at an annualized rate of almost 40%. Strength in the report was similarly predictable, and although consumption slowed to an annualized pace of 2.2% last quarter, it still contributed 1.5% to growth, and residential investment proved to be a tailwind following an unusually mild start to the winter. In 2015, real GDP increased at an above-trend rate of 2.4%, matching economic growth in 2014. While there was some weakness in this quarter’s report, growth at an annual pace of 2.4% is consistent with our expectation for continued rate increases in 2016, and the details of this report highlight that the consumer is alive and well.

For more information please visit the Source below.

(Source: JPMorgan)

How China Could Trigger a Global Crisis

China
Wikimedia

When China sneezes, the rest of the world might not catch a cold, but it does feel bad for a couple of days. The question, though, is whether China is sicker than it seems and how contagious that would be for the global economy.

In other words, is China’s latest stock market selloff — the Shanghai index lost 15 percent of its value in the past six days — and currency devaluation just a blip or the beginning of a bust? I say latest because the same thing happened in August. That was our first real inkling that Beijing might not have as much control over its economy as it seemed. And now we know: it doesn’t. It’s made one ham-handed attempt after another to prop stock prices up to unsustainable levels—buying shares itself and banning others from selling—which only works as long as it keeps doing so. But more than that, it’s the fact that the government either can’t decide whether it wants a cheaper currency or can’t stop it from happening that hints at bigger problems under the economic hood. It’s enough that no less an authority than George Soros thinks this could be like 2008.

What’s going on? Well, China is trying to manage a slowdown that was always going to happen at the same time that it deflates a credit bubble that it wishes hadn’t happened. Either one would have been hard enough on its own, but together they might be too much for even the most competent government to deal with. That’s because Beijing needs to intervene even more to keep the economy growing today—at least as much as it wants—but loosen its grip on it to keep it growing tomorrow. So there are two dangers. The first is that a tug-of-war within the government leads to half-measures that don’t solve either problem. And the second is that fears over a tug-of-war might make these problems harder to solve than they already are. Still, we shouldn’t overstate this. It’s not like China’s economy is about to collapse. Its growth is real, if not as spectacular as it was before. It just might slow down further or faster than we thought, grinding down to 3 or 4 percent growth instead of 6 or 7 percent.

But let’s back up a minute. Why was it inevitable that China’s economy would shift down to a lower gear? Simple: its old growth model had run out. There are only so many people you can move from the farms to the factories—especially when you only let them have one kid—and so much infrastructure you can build before you run out. Now, China hasn’t quite reached that point, but it has gotten to the one where there aren’t as many people moving to the cities as before. And that’s enough. It not only makes it harder for the economy to grow as much, but also makes it harder for companies to export as much now that, without a steady stream of would-be workers holding down wages, they have to pay people more.

You can probably see where this is going. If workers are making more, they can spend more—and that, rather than selling things to foreigners, can power the economy. But that’s a lot harder than it sounds. First, you need a stronger safety net so people feel more comfortable splurging. Then, you need to give them time for their habits to change. But, most importantly, you need to keep adding higher-paying jobs.

It’s this last part that would force Beijing to do what it doesn’t want to: give up at least some of its control over the economy. Think about it like this. In the short-term, wages are going up because workers have more bargaining power, but, over the longer-term, that will only continue if productivity increases. Workers, in other words, have to make more or better stuff to make more money. How do you do that? Well, the government would have to start deregulating the economy so businesses could expand where they had to and stop supporting zombie companies that were blocking the way. Beijing has actually talked about this quite a bit, even commissioning a rap song about supply-side reforms, but, as we’ve seen with stocks, this determination to give markets a “decisive” role in the economy has only lasted as long as they give the “right” answer.

That brings us to problem number two. Everything we’ve been talking about, this shift from a saving to a consuming society, well, takes time. So what is China supposed to do until then? Beijing’s answer has been for everyone to run up a lot more debt—and by “a lot,” I mean four times as much. Indeed, between 2007 and 2015, China’s total debt, including the government, households, and corporations, increased from $7 trillion to $28 trillion. That’s 282 percent the size of its economy, which is more than we have relative to ours.

Now, most of this hasn’t directly been on Beijing’s books, but has rather come at Beijing’s direction. The idea, at least, made sense. That was to replace all the foreign customers who disappeared during the financial crisis with even more infrastructure spending until Chinese customers were ready to take their place. In practice, though, it hasn’t worked out that well. Developers built cities where nobody lives, companies built factories that nobody needs, and local governments built airports that nobody uses. It hasn’t all been wasteful—and who knows, 10 years down the line, what is today might not be—but right now it sure looks like a bubble not all that different from the one we had. Consider this: more than half this debt is tied to a property market that, since 2008, has gone up more than 60 percent in the 40 biggest cities. So far Beijing has been able to keep prices from falling too far, but only by letting people pile new debt on top of the old. That is not a long-term solution.

But it’s hard to tell how much this will hurt. It’s not just that nobody believes China’s official numbers. It’s that even if you did, they might not be worth that much anymore. As Larry Summers points out, about 20 percent of China’s growth the past year has come from financial services despite the fact that it was already a pretty big share of the economy. That’s as close as you’ll get to a flashing red warning sign saying “bubble”, as we found out with our own.

So what’s a better way to tell how China’s economy is doing? Well, how about how much people are willing to bet on it—or not. The simple story is that money has been pouring out of China the past year or so, and that actually accelerated in December. Part of this is probably due to wealthy Chinese moving their ill-gotten gains out of the country to stay a step ahead of the government’s corruption crackdown. But a bigger part is probably that people who thought they could make a quick buck investing in China are changing their minds now that it’s slowing down—which is contagious. Here’s why: when people move their money out of China, what they’re really doing is selling their yuan to buy, say, dollars. But that’s just another of way of saying that there isn’t as much demand for yuan—so its price falls. And if that happens, other people who hadn’t wanted to get their money out of China might decide that they better do so before it loses any more value.

That’s why, Beijing has actually been trying to stop its currency from falling too much. It has allowed the yuan to depreciate modestly, but if it was left up to the market, it would have fallen a lot more, given the economy’s fundamentals. The only problem with this strategy is that might be the worst thing it could have done. The best way to think about that is to think about what would have happened if it’d just let the yuan fall as far as markets wanted it to. And the answer, as Paul Krugman explains, is that it would trigger a trade conflict with the United States (where politicians are quick to claim China is manipulating markets) and elsewhere. It would be a big drop, probably bigger than the fundamentals say it “should,” but then people might see it as properly valued and perhaps even expect it to start rising—which it then might.  And it’d be over. And best of all, Beijing wouldn’t have to spend any of its war chest of reserves. That, after all, is how the government tries to prop up its currency: by buying yuan with some of the dollars it’s stored up.

But by buying just enough to keep the yuan from falling suddenly, while still allowing it to trend slightly lower, the government is telling people that they’re right to move their money out of the country since it will, in fact, be worth a little less if they wait. That puts more pressure on the yuan to fall, and more pressure on the government to keep it from falling by spending its reserves. The end result is that the currency might fall just as much as it would have if you let it fall all at once, but at the cost of a lot of its war chest. And that is a real cost. It sucks even more money out of the economy, which, in turn, forces the government to cut interest rates just to keep growth from slowing down even more. The lesson, then, is that you’d be better off either spending so many reserves that your currency doesn’t fall at all, or just letting it go. A controlled fall is the most expensive kind.

China’s economy might be a riddle wrapped in a mystery inside an enigma of dodgy data, but its currency is telling a clear story. The people who have the most on the line—that is, ones with money in the country—are worried that the economy is going to slow down a lot more than the government says. The worry is that if, after spending down its reserves, China is forced to let the yuan slide, other countries might follow so their exports don’t lose competitiveness—and emerging markets that borrowed in dollars might found their debts too hard to pay back. That wouldn’t quite be 2008 all over again, but it’d be close enough for a global economy that is still struggling to recover from the last one.

The rest of the world will be okay if China is just sneezing, but not if it’s more than that.

Written by Matt O’Brien of The Washington Post

(Source: The Washington Post)

Fourth Quarter, a Look Back…

ECB Announces Monthly Rate Decision
Photographer: Hannelore Foerster/Bloomberg

The Federal Reserve pulled the trigger. At the December Federal Open Market Committee meeting, the Fed finally acted, tightening monetary policy by raising the funds rate from 0.25 percent to 0.50 percent. It’s important to remember the Fed doesn’t actually set interest rates. It takes actions designed to influence financial behaviors. The Fed has given rates a push, it remains to be seen whether its efforts will bear fruit.

The European Central Bank (ECB) acted, too. Although, its monetary policy moved in a different direction, offering additional stimulus measures to support European economies. Investors were enthusiastic when the ECB announced its intentions; however, markets were underwhelmed when the economic measures delivered were less stimulative than many had expected.

China’s currency gained status. The International Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket, effective October 1, 2016. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket, the euro will be 31 percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent, and the British pound will also be 8 percent.

Congress tweaked Social Security. The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred further discussion of U.S. debt and spending levels until after 2016’s presidential and congressional elections. It also did away with two popular social security claiming strategies. The restricted application strategy was discontinued at the end of 2015, and file and suspend strategies will be unavailable after May 1, 2016.

Medicare premiums go up, but not for everyone. The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new premium will be $121.80, up from $104.90 in 2015. Original proposals suggested the premium amount increase to $159.30.

Weekly Market Commentary: January 11, 2016

Provided by geralt/Pixabay
Provided by geralt/Pixabay

The People’s Bank of China (PBOC) started the New Year with a downward currency adjustment and fireworks followed.

Last week, three distinct issues affected China’s stock market. First, the PBOC’s devaluation of the yuan (a.k.a. the renminbi), along with the knowledge the central bank had been spending heavily to prop up its currency in recent months, led many analysts and investors to the conclusion China’s economy might not be as robust as official reports indicated, according to the Financial Times.

Not everyone was surprised by this revelation. During the fourth quarter of 2015, The Conference Board’s working paper entitled Global Growth Projections for The Conference Board Global Economic Outlook 2016 reported:

“China’s economy grew much slower than the official estimates suggest in the recent years. During the last five years, our estimates suggest an average growth of 4.3 percent, which is substantially lower than the official estimate of 7.8 percent. In 2015, we project China to see an average growth of 3.7 percent, which is indeed lower than the official target of 7 percent.”

Second, state-run media made it clear the Chinese government would not step in to spur growth. Allowing market forces to play out is a requirement of the reforms international investors have been demanding of China, according to Barron’s. The publication suggested Chinese President Xi Jinping is the victim of a Catch-22. The Chinese government took steps toward reform and international investors responded by selling shares in a panic:

“Weaning China off excessive credit, investment and import-led growth in favor of services means slower growth. Markedly slower, in fact, than the 6.5 percent Beijing is gunning for this year. But Monday’s 7 percent stock rout shows international investors want it both ways. The rapid growth, innovation, and disruptive forces that capitalism produces? Yes. The downturns and volatility that come with it? Not so much.”

The third factor was China’s new and very strict stock market circuit breakers, which were introduced on January 4. The circuit breakers were intended to calm overheated markets, but they sparked panicked selling instead. When the Shanghai Shenzhen CSI 300 Index falls 5 percent, Chinese stock trading stops for 15 minutes. When the index is down 7 percent, trading stops for the day. A similar mechanism is employed in U.S. markets, which are far less volatile. However, trading is not delayed until the Standard & Poor’s 500 index has fallen by 7 percent, and it does not stop until the index is down by 20 percent. Last week, China’s stock markets closed twice as investors, who were worried the circuit breakers might kick in, rushed to sell shares.

China suspended its circuit breakers on Thursday, and the PBOC set the value of the yuan at a higher level. That helped China’s stock markets, and others around the world, settle. China’s markets gained ground on Friday, although U.S. markets finished the week lower. Markets may continue to be jittery next week as “a tsunami of negative psychology driven by China” works its way through the system, reported Reuters.

Data as of 1/8/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) -6.0% -6.0% -6.8% 9.7% 8.7% 4.1%
Dow Jones Global ex-U.S. -6.1 -6.1 -11.1 -2.6 -2.0 -0.5
10-year Treasury Note (Yield Only) 2.1 NA 2.3 1.9 3.3 4.4
Gold (per ounce) 3.7 3.7 -9.4 -12.7 -4.2 7.4
Bloomberg Commodity Index -2.3 -2.3 -26.0 -17.8 -13.5 -7.6
DJ Equity All REIT Total Return Index -3.0 -3.0 -4.6 8.8 11.1 6.5

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

More Evidence Russia’s Economy is Running on Empty

Russian car sales are getting absolutely obliterated at the moment.

Sales of light vehicles plunged by an astonishing 42.7% in the year to November, underlining the country’s economic turmoil.

That data comes from the Association of European Businesses.

Some major brands which sold more than 10,000 models in November 2014 saw their sales collapse even further — Toyota and Nissan’s each fell by 53%, while Chevrolet purchases crumbled, dropping by 71% in just 12 months.

In total, there were 131,572 sales in November this year, in comparison to 229,432 in the same month during 2015. For the first 11 months of the year, Russian consumers have bought 765,000 fewer light vehicles than they did in the first 11 months of 2014.

Other sectors of the economy aren’t doing quite so badly, but the stunning collapse of the ruble means that imported goods are now prohibitively expensive for Russians. Even cars actually produced in Russia will require parts and materials from elsewhere in the world, and they’ve shot up in price.

Here you can see the dollar surging in value against the ruble:

USDRUB
Provided by Business Insider
The AEB notes that in November last year, the ruble’s plunge had begun, and people were rushing to make purchases of foreign goods, making the decline in the last 12 months particularly sharp.
Russia’s GDP has slumped with global oil prices, and though it’s likely to come out of recession next year, the country’s currency has dropped in value by more than half against the dollar over the last two years.
President Vladimir Putin’s former finance minister even thinks the pressure on Russia means that it will exhaust its currency reserves soon.
Written by Mike Bird of Business Insider
(Source: MSN)

Weekly Advisor Analysis: December 7, 2015

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.

WAA
Provided by The Wall Street Journal

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.

WAA1
Provided by The Wall Street Journal

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.

Chart of the Week: November 30, 2015

Screen Shot 2015-11-30 at 3.39.39 PM

Diverging central bank policy has been a well-televised theme in 2015, and in mid-December, divergence may finally begin. This week, the European Central Bank may ease monetary policy further in an effort to stimulate inflation expectations across the European economy, and two weeks later, the Federal Reserve is expected to raise the federal funds rate. Though the expectation of these policy moves is fairly consensus, the financial impact is largely unknown. For example, rising short-term rates in the U.S. and lower rates in Europe should, in theory, lead to dollar appreciation. However, the expected difference in interest rates may already be priced in. Turning to long rates, the impact of diverging monetary policies is more apparent. This week’s chart shows the positive correlation between 10-year government bond yields in Germany and the U.S., which suggests that low rates in Europe will likely anchor long rates in the U.S. While U.S. government bonds may face some headwinds, even from a gradual increase in rates, the more credit-sensitive sectors of the bond market may not feel this same pain. In fact, slowly rising interest rates are a navigable headwind for credit, as this has historically led to tighter spreads, rather than higher yields, and is therefore less pain for investors in this space.

For more information please visit the Source below.

(Source: JPMorgan)

Weekly Advisor Analysis: November 9, 2015

The equity market strained its eyes last week with all of the intense Fed watching. The gains posted early in the week began to crack on Wednesday when Federal Reserve Chair Janet Yellen hinted at a “live possibility” of a rate hike following its mid-December meeting. The market’s enthusiasm was also held in check on Friday following the promising jobs report, which many believe will make a rate liftoff in December a slam dunk. Despite this, stocks still managed to post gains for the week. The S&P 500 index rose 1 percent, the Dow Jones Industrial Average climbed 1.4 percent, and the NASDAQ composite jumped 1.9 percent.

Impressive Jobs Report Paints Fed Into Corner

No matter how you slice it, the October jobs report was strong. Non-farm payrolls added 271,000 jobs. This not only blew away the consensus estimates but pushed the monthly average above 206,000 new jobs for 2015. This is the second highest figure since 1999. On top of this, the unemployment rate dipped to 5 percent, its lowest level since 2008. Even the broader measure of underemployed workers, which includes part-time employees who are seeking full-time gigs, fell below 10 percent for the first time in seven years. The manufacturing sector displayed some weakness, but almost every other industry showed strength. In fact, the dispersion index – a measure of the breadth of job growth – expanded to 61.8 percent from below 54 percent last month. Most importantly, wages are finally starting to rise. Earnings jumped 2.5 percent on a year-over-year basis. This is the fastest rate in six years and shows steady improvement each month for the past three. The impressive jobs report has pushed the odds of a December rate hike by the Federal Reserve to 70 percent. This was below 60 percent the day before the jobs report release and just 38 percent one month ago.

http://blogs.wsj.com/economics/2015/11/06/the-october-jobs-report-in-12-charts/
http://blogs.wsj.com/economics/2015/11/06/the-october-jobs-report-in-12-charts/

The Dollar Bulks Up Ahead of Rate Rise 

The increased prospect of a Federal Reserve liftoff in December has pushed the value of the U.S. dollar to its highest level in almost 13 years. The Wall Street Journal Dollar Index, which values the dollar against a basket of 16 currencies, jumped 1.2 percent on Friday following the positive jobs report. This is its highest level since December 2002. Individually, emerging market currencies suffered the most. The Mexican peso fell 1.2 percent, the Russian ruble declined 0.9 percent, and the South African rand collapsed 2 percent. A stronger dollar tends to hurt commodity-based emerging economies by making exports more expensive. Additionally, emerging countries tend to issue a significant chunk of debt denominated in dollars, and a rising greenback makes it harder to repay.

http://www.wsj.com/articles/dollar-rallies-on-strong-u-s-jobs-data-1446818202?alg=y
http://www.wsj.com/articles/dollar-rallies-on-strong-u-s-jobs-data-1446818202?alg=y

The Bull Bounces Back in China 

Late last week China officially entered a bull market when the Shanghai Composite Index closed more than 20 percent above the lows posted on August 26. Investors have returned to the market after the rout experienced in late August. Margin loans are increasing and daily trading volume is rebounding as efforts by the Chinese government to stabilize the markets appeared to have worked, for now. The return of the market has prompted the government to lift its temporary ban on initial public offerings. The China Securities Regulatory Commission recently approved 10 companies for listing, and shares are expected to begin trading within a few weeks.

http://www.wsj.com/articles/japan-shares-rise-on-yen-weakness-1446688340
http://www.wsj.com/articles/japan-shares-rise-on-yen-weakness-1446688340

Fun Story of the Week

The falling leaves and shorter days are sure signs the autumnal equinox has passed. More commonly known as the first full day of fall, we are more than a month beyond this annual milestone. However, last week marked a much more rare event: the “sports equinox”. This rare occasion occurs when the stars align for sports fans and all four major U.S. leagues host at least one game on the same day. Sunday, November 1 included game 5 of the World Series, 12 NFL games, seven NBA contests, and five NHL matchups. There have only been fifteen such occurrences in history, and this year marks the first “sports equinox” since 2010.

A Large Order of McDonald’s Fries Costs About $126 in Venezuela

© Provided by Business Insider McDonald’s

The good news is McDonald’s is finally bringing back fries in Venezuela, after getting rid of them last year, according to the AP. The bad news is the regular will cost about $79 (500 bolivars), according to the country’s strongest exchange rate.

Worse, a large will cost about $126 (800 bolivars).

The exchange rates were calculated at the time of publication.

Still, at Venezuela’s black market rate, these prices would be $0.64 for the regular, and $1.15 for the large, according to Fusion.

However, at the black market exchange rate, Venezuela’s minimum wage is only about $13 per month.

So, with those numbers, one large fries would cost nearly 9% of a person’s monthly wage.

Venezuela’s economy has been in a tough spot for a while now. It has been struggling with rampant inflation, dwindling FX reserves, and lower oil prices.

And analysts haven’t been feeling too optimistic about its immediate future.

“Venezuela seems to be going from worse to worse,” writes RBC Capital Markets’ Helima Croft wrote earlier this summer.

Those $126 fries are definitely a turn for the worse.

Written by Elena Holodny of Business Insider

(Source: Business Insider)