The FOMC is widely expected to announce an interest rate increase – market analysis by Junaid Wilson
It was another bad week for equities and commodities as investors waited for the FOMC meeting which takes place on December 15 and 16. With investors expecting the Fed to raise its key fed fund rate on December 16, focus was on crumbling oil prices, especially after OPEC failed to agree to production quotas at their meeting on December 4. Warm weather in the U.S., while welcomed by the populace after last winter’s cold and snow, has reduced demand for energy products.
Stock markets worldwide tumbled on Friday as falling Brent crude oil prices to seven-year lows and a drop in China’s yuan currency fell as investor risk aversion is ahead of a widely anticipated U.S. interest rate increase. Equities sank as crude prices plunged on continued oversupply concerns. Indeed, the International Energy Agency said it sees the oil glut worsening in 2016 as demand slows and OPEC shows no signs of slowing production. All equity indexes were down for the week.
Investors were also cautious ahead of the Federal Reserve meeting. The FOMC is widely expected to announce an interest rate increase when it concludes its monetary policy meeting on Wednesday. Meanwhile, UK interest rate increase expectations tumbled to their lowest level in two years according to the results of a quarterly survey by the Bank of England.
The U.S. dollar declined against the euro, yen, pound and Swiss franc last week. However, the dollar gained against all others followed here including the commodity currencies — the Australian and Canadian dollars. The U.S. currency dropped after the European Central Bank disappointed markets with less stimulus than traders had expected. This sent the euro upward and talk of parity disappeared.
China’s People’s Bank of China signalled its intention to change the way it manages the yuan’s value by potentially loosening its peg to the U.S. dollar and instead letting it track the currencies of its broader trading partners. In an editorial posted on its website Friday night (local time), the PBoC said it makes more sense to measure the yuan’s exchange rate against a basket of currencies than the US dollar alone. The foreign exchange trading system run by the central bank will start calculating a yuan exchange rate index Friday to provide a reference against a basket of currencies.
The US dollar has surged by more than 22 percent against a basket of currencies since June 2014. But has remained in a range for much of this year. The Chinese renminbi, which is “fixed” to the dollar each morning and only allowed to trade within a tight band of that rate, has been taken along for the ride. The rapid climb has made the country’s exports less competitive with rivals in Southeast Asia, contributing to a slowdown in the economy. The shift can also be seen as a way to give China room to back away from the U.S. dollar, particularly if the Federal Reserve lifts rates next week and the currency strengthens further.
Looking forward this week, one thing we can guaranty is there will be volatility, a lot of it.