Equity Update – Domestic Stocks

A data sensitive environment has evolved into a wait and see scenario as the Fed’s uncertainty regarding interest rates continues to cause volatility in the equity markets.

The third quarter was positive for equities as the technology and financial services sector provided gains for the major indices. For the quarter, the Dow Jones Industrial Average was up 2.78% and the S&P 500 Index added 3.85%, both on a total return basis. The technology heavy Nasdaq Composite Index was up 9.69% for the third quarter.

It’s always welcoming when the bond market helps the equity markets. The benefits of rising prices for high yield corporate bonds translate into lower borrowing costs for companies, thus leading to greater margins and propelling stock prices. (Sources: Reuters, Bloomberg)

Fixed Income – Global Bond Markets

Some fixed income analysts believe that the Treasury yield curve is showing signs of mispriced bonds between long-term and short-term maturities, adding volatility to the overall bond market.

It is now estimated that there are over $12.6 trillion worth of bonds globally that yield less than zero. This dynamic is placing tremendous pressure on the world’s central banks to find a policy that will eventually stimulate economic growth and inflation. The Bank of Japan has had little if any success with its ultra-low negative yielding government bonds. All in all, this essentially means that Japanese rates will stay well below those in the United States for quite some time.

Money market funds reform has triggered a change in the London interbank offered rate, also known as Libor. Historically, higher Libor rates translate into higher long-term bond yields.

U.S. money fund reforms are set to take effect in the middle of October and have already affected short-term rates, notably the benchmark London Interbank offered rate also known as LIBOR. LIBOR is the base rate for many U.S. loans including various home mortgages, thus if LIBOR increases, then some mortgages in the U.S. could also see an increase in lending rates. Libor has risen by over 50 bps in the past year to 0.8456%, while the Fed has barely raised its short-term rate just 25 bps to 0.25-0.50%. (Sources: Bloomberg, Reuters)

Median Household Income Rises – Demographics

Median household incomes in the U.S. rose for the first time in eight years, elevating the median annual national income to $56,516, yet still 1.6% below 2007 levels.

Income data is closely followed by economists and the Fed as a critical determinant of the economy’s strength and well-being. A rise or fall in incomes is an indicator of future spending habits by consumers. Employment numbers also give the Fed and economists plenty of data to digest, however, income is monumental since it helps identify discretionary income, the amount of money left over after paying all household and living expenses. So as incomes rise, consumers will tend to spend more, thus helping to elevate economic activity.

Sources: U.S. Census Bureau

What Countries Are Buying U.S. Oil – International Trade

Following a 40-year ban on U.S. oil exports that was lifted in December 2015, more than 87 million barrels of crude oil have been shipped to 17 countries in the first half of 2016.

The largest and most consistent U.S. crude oil export destination for the first five months of 2016 has been Curacao, an island nation located in the Caribbean Sea north of Venezuela. Refineries on the island nation owned by a state run Venezuelan company, mix the higher quality U.S. crude oil with lower quality crude oil from Venezuela in order to re-export more easily to other countries.

In response to the Arab oil embargo, the U.S. imposed regulations in 1975 that restricted the exportation of crude oil. For years, oil companies and industry leaders have sought a relaxation of the export restrictions in order to compete in the global oil markets. U.S. oil exports are now directly competing with cheap Russian oil exports, which has been aggressively pursuing oil trading relationships from China to Belarus.

Another factor affecting U.S. oil exports is how oil is actually paid for. For decades oil has been traded internationally with the U.S. dollar, known in the oil industry as petrodollars. However, over the decades there has been a growing reluctance by many countries having to rely on the U.S. dollar to trade oil, especially China and Russia. So there has been a growing movement to de-dollarization oil trade internationally. Just recently, China and Russia forged an agreement to trade oil between their two countries in yuan and rubles only. Russia is now actively seeking establishment of a ruble based pricing system that will reduce the dependence on the U.S. dollar.

Sources: Department of Commerce, EIA

Cheap Oil Affects Countries Worldwide – Oil Industry Update

A non-routine meeting set for late September in Algeria disrupted oil markets as the meeting was seen as a precursor to production level changes. Non-OPEC member Russia, the world’s largest oil producer, is set to attend the meeting and could announce moves to help stabilize oil prices. Low oil prices have created a precarious situation for those countries that primarily rely on oil to keep their economies intact. Venezuela, the leader in proven oil reserves, could run out of cash within a year as well as dealing with a serious food shortage. Over 95% of the country’s total trade revenue is dependent on oil. The IMF estimates that inflation in Venezuela will reach 720% this year, and a projected 2,200% in 2017. Shortages are widespread with everything from food, beer, and medical supplies to toilet paper.

Oil markets expect a production cut agreement to evolve from the Algeria meeting, which will help stabilize prices from their two-year plunge. An obstacle to essential production cuts may continue to be Iran, which has declined to entertain a production freeze until its output returns to pre-sanction levels.

Sources: OPEC, IMF, Bloomberg