Wall Street slips on Friday as rate rise euphoria fades

Monday, December 21, 2015

It seems the euphoria from last week’s interest rate increase in the US quickly dissipated as stocks on Wall Street faced firm selling pressure on Friday. The era of near zero interest rates has ended and after agonizing over the date when the US Fed would eventually raise rates, investors are now turning their attention to the expected path that benchmark US rates will take.

The majority of market participants polled by Bloomberg and the FT expect the Fed to increase rates by another 25 basis points as early as March next year. But it seems that the expectations of the central bank and market participants are already diverging. The Fed expressed in its accompanying FOMC statement that it would look to a total of four 25 basis point increases in 2016, bringing the fed funds rates to a target 1.375% by the end of next year. However, market participants expect a markedly shallow rise in rates with expectations of the benchmark rate holding below 1%  by the end of next year.

The dollar index remains well supported around 98.700 early on this morning after giving back some of Thursday’s gains on Friday. It’s been a particularly volatile year for the USD and after a bullish first quarter which saw the greenback rally almost 10% against a basket of major currencies the rest of the year was spent whipsawing broadly between 94.000 and 100.000 with spikes either side as investors reacted to the risk on again, risk off again outlook of the US economy and flip-flopping from the US fed, from hawkish to dovish and back again. The dollar index is trading around Friday’s close early on and we only have the Chicago Fed national activity index to look forward to today, but tomorrow will see the release of the third reading of Q3 GDP, third quarter personal consumption and housing market data.

Just when you think it couldn’t get any lower, front month Brent futures have hit a fresh year-to-date low this morning as the global crude benchmark trades towards $36/bbl early on this morning. Brent hit a fresh 11 year low as the global supply glut shows no signs of slowing down and with output in the Middle East and over in the US steadily growing it’s clear market participants are expecting the glut to persist for some time. Having breached the lows seen during the financial crisis in 2008 the recent price pressure was attributed to last week’s final approval of US legislation which lifted the 40 year ban on crude exports which will only see more crude oil flood the global market. Compounding worries for the industry is a tightening monetary policy outlook in the US as the Fed settle on the path to rising rates which could see additional dollar strength, capping any upside price potential in commodity markets.

Dollar index holds around Friday's close early on today

DXY Curncy DOLLAR INDEX SPOT 2015 12 21 08 09 02

Brent futures slip to fresh low on supply concerns

CO1 Comdty Generic 1St CO Fut 2015 12 21 08 08 52

Events for today

0700

DE

Nov

PPI

1330

US

Nov

Chicago Fed Nat Activity Index

1500

EZ

Dec

Consumer Confidence

Topics: GDP, Crude oil, Brent, DXY
More from: Kash Kamal