Oil tumbled to a six year low, touching off a rout in the equity markets as energy related shares tumbled with currencies of commodity producing nations. The dollar rallied. In other words, trading was similar to that of the last 10-12 months….long the dollar and short commodities.
Commenting about oil, crude is now around $38 barrel as OPEC essentially abandoned any strategy of limiting production albeit few believe production is able to rise higher than the current quota of 31.5 million barrels that have been produced daily for the last 18 months.
Some are commenting Saudi Arabia is still trying to bankrupt American shale producers. I don’t share this view as I believe it is about bankrupting Iran and perhaps Russia. The brutal fight for Middle East or Sunni/Shiite dominance is raging.
What will be the outcome of this brutal war, the outcome of which is infinite? The IMF has stated eight of twelve OPEC nations, including Iran, are on the verge of the proverbial fiscal cliff. Typically if a country is in economic and/or civil crisis, the methods of production are greatly reduced.
Will the narrative soon change to next week’s Fed meeting? It is widely accepted the target for Fed Funds will be lifted for the first time since 2006.
According to Bloomberg, since 1948 the Fed has increased its benchmark on 188 occasions against a quarterly backdrop in which the average growth in nominal GDP was 8.6%. Only in the third quarters of 1958 and 1982 did the Fed shift when nominal growth was undershooting 4.5%.
Since the recovery began in the middle of 2010, nominal GDP has averaged 3.9% in a range between 3.3% and 4.7%.
With the above written, the overnight rate has never been at 0.0%, some asset prices (i.e. Treasuries) this high, with debt this large.
What will be the impact? As noted many times, I think an increase is more symbolic than substance. How will the HFTs respond? Oil was crushed yesterday on maintaining the status quo, I believe the result of all abandoning crude, an abandonment amplified by technology based trading.
Last night the foreign markets were down. London was down 1.08%, Paris down 1.27% and Frankfurt down 1.40%. China was down 1.89%, Japan down 1.04% and Hang Sang down 1.34%.
The Dow should open about 150 points lower on global growth concerns as China released some disappointing data. The 10-year is up 4/32 to yield 2.22%.
WILL THE NARRATIVE SOON CHANGE FROM OIL TO INTEREST RATES?
Ken Engelke
Chief Economic Strategist Managing Director
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