Marcus TJ

Federal Reserve Rate Hike 

The Federal Reserve recently announced that they were hiking up the price of target federal funds by a quarter of a point from 0.5% to 0.75% in a move that had been long expected by financial analysts. This is only the second time that the Federal Reserve have increased rates in a decade, doing so last December, as they look to put rates in line with the strengthening U.S. economy.

Plans have also been drawn up by the Federal Open Market Committee and its chair Janet Yellen for three more price hikes in the next year and 2/3 more in 2018 as they look to arrive at a 3% rate. Let’s look at the details of the rise and the affect which it might have.

The Decision

The decision to raise interest rates has been made after a series of meetings with the committee, this is the 3rd time that Yellen has tabled the idea of a rate hike since the initial rate increase in December 2015. In the past, the decision has not been unanimous as many felt that the economy wasn’t improving at the necessary rate. Following the last meeting however, all agreed that the interest rate could be increased to match inflation levels.

Good News or Bad News

On the face of it, a rising rate could appear like bad news for many but it is in fact a strong sign of a growing economy. It is important to remember that interest levels were at around 5% in 2006 and during the 80s it was as high as 10%. In that sense 0.75% doesn’t look so bad.

How the Market Reacted

As this wasn’t an unexpected move, the market didn’t spiral out of control when the decision was announced, there were some loses felt, but nothing too hard to recover from. The Dow Jones index closed at around 120 points down with Caterpillar Inc. being the biggest decliner, Nasdaq fell by almost 0.5% and the S&P 500 fell 14.6 points as the energy sector lead the fall with an average 2% drop. This was nothing out of the ordinary for the markets as any decision from the Federal Reserve to change prices will see an uncertain reaction from the market.

What Global Impacts Will This Have?

When the U.S. makes such a decision its impact is always felt throughout the world and the decision to raise rates was no different. To begin with, higher rates have meant that debt repayments on American loans will be higher as they are given out in dollar denominations. Exports from Asia and the EU to the United States will also become cheaper and the rising dollar will likely cause a buzz on the forex markets. It is also likely that investment capital will move away from Asia as many utilize the higher interest rates on the Atlantic to push for better returns.

This is just the second of many price hikes that the U.S. will see in the coming years and whilst it does tell of a stronger U.S. economy, it will be interesting to see how the markets reacts in the coming weeks and months.

Marcus TJ

At the beginning of 2016 the World Bank slashed its price forecast for 80% of major global commodities. Crude oil, precious metals and many more were all predicted to continue dropping in value, as the commodities slump which has been ongoing since 2011 didn’t look like slowing down at all this year.

Much of that prediction has rung true, but once again there have been a number of important events that have significantly affected the volatility of commodity prices. These are some of the major ones which have introduced a lot of risk to commodity trading, some of whose impact will still be felt in 2017.

Brexit

As one of the most popular safe-haven investment options, it was little surprise that the price of gold increased in the aftermath of Brexit. After years of debate the UK finally had a national referendum at the end of June regarding its EU membership. This in itself was always going to inject some volatility for commodity traders, but the somewhat surprising result added an extra amount.

Along with gold experiencing a sharp spike in the days after Brexit, other commodities such as oil, copper and more all dropped. The uncertainty of the Brexit decision and what would happen regarding trade between the UK and other nations triggered such falls in value.

US Election

Political events always cause price fluctuations across many markets, and as arguably the biggest in 2016 the US election had a large impact on commodities. Historical data has shown that in the weeks following an election the price of oil generally slides after the election and gains again after their inauguration.

In a similar way to Brexit, the election of Donald Trump was something of a surprise. Plus, with oil prices already struggling before the election, it made it harder to determine which factors were most responsible for falling oil prices.

Demand in Emerging Markets

Supply and demand have a major impact on commodity prices as they are traded assets. If demand outstrips supply or vice versa then they can swing massively one way or the other. Emerging markets had been growing and supporting the commodities market but in 2016 they became a little bit more divergent.

Commodity-exporting emerging markets such as Brazil had been riding a positive wave, but its output was predicted to contract in 2016 as demand fell. On the other hand, for Mexico it was forecast to grow, mainly due to the strong performance of the USA, as its largest trading partner.

Chinese Action

As the largest country on the planet and one of the fastest growing economies, whatever China does seems to impact upon commodities. By 2014 it was responsible for 47% of world metals consumption, while also one of the largest manufacturers and exporters.

In 2015 China shocked the world by devaluing its own currency which led to a sharp downturn in commodity prices. In 2016 the country continued to devalue its currency but at a much smaller rate, while its manufacturing levels were down as well, resulting in supply and demand fluctuations and consistent price changes.

Global Storms

Weather can have a big impact on commodities such as wheat, coffee, rice and many more. Supply can be limited when storms hit certain regions, destroying crops and these commodities while the demand for them is likely to remain at the same level.

There were many hurricanes, storms and other forms of destructive weather in 2016 that hit areas known for producing some of these commodities. There are always scares about there being a lack of certain commodities but for the most part these storms did not have too bad an effect on the production or price of commodities.

Monetary and Environmental Policies

Monetary and policy imbalances will be reflected in a supply and demand imbalance, leading to price fluctuations in the commodities market. China devaluing its currency created one such imbalance, while worries about what would happen to the US dollar and its other policies when Trump takes charge was another factor. Environmental policies were being rolled out by many nations to tackle climate change and global damage, which also impact upon the production of certain commodities.

Consider how these events affected the commodities market in 2016 and begin planning your trading strategy for 2017 based around future possibilities.

Marcus TJ

If you have not seen the Oscar-winning film The Big Short, you are missing out on a truly seminal movie. This vehicle narrates the tale of the sub-prime mortgage collapse in the U.S., which of course sparked the great recession and a global, economic decline. More specifically, it explores the actions of Wall Street trader Steve Eisman, who foresaw the collapse of the housing market and profited by betting billions against the banks holding onto mortgage assets.

Eisman made billions from this tactic and it is a philosophy that has continued to underpin his trades since essentially taking advantage of the natural fluctuations of the economy in the same way that forex and commodity traders operate. He remains tight-lipped about the precise derivatives and markets that he is expecting to plummet, of course, but recent trends and developments have made it clear that he has a prominent target in mind at present. With an estimated $25 billion having been withdrawn from hedge funds during the last three quarters (and given the continued plight of the Eurozone), continental Europe’s banks have emerged has an obvious target for Eisman and similar traders at present.

Why Italy’s Constitutional No Vote Could be the Trigger for Another Economic Collapse 

While these factors have been ongoing for a prolonged period of time, there are fears that the decision of the Italian electorate to reject Prime Minister’s Matteo Renzi proposals for constitutional reform. Perceived as an attempt to reduce the power and influence of the electorate, this has the potential to trigger widespread uncertainty and decline while it has already accounted for the resignation of Renzi himself.

With calls for a snap-election, Italy could follow the lead of the U.S. by voting in a popularist, anti-establishment party and candidate. The Five Star Movement has gained tremendous credibility in recent times as outgoing Prime Minister Renzi’s popularity has gradually declined, with this party’s main electoral pledge being to hold a referendum on Italy’s continued membership of the Eurozone. This, in turn, could have a huge impact on the vulnerable and increasingly fragmented Eurozone, while potentially triggered the break-up of the ailing single currency.

In truth the value and appeal of the Euro has been in decline ever since the Greek financial crisis first began, but the latest developments could be the trigger the total disintegration of the single, European block and a period of sustained economic decline across the globe.

The Bottom Line: What Will the Immediate Economic Impact be and Can it be Avoided? 

Italy’s recent veto of Renzi’s reform proposals has already caused national economic unrest, while further exacerbating the issues surrounding the European central banking crisis. It has also reduced the prospects of driving structural reform within the Italian government, causing a contraction in growth and pushing the nation further towards a recession. A departure from the Eurozone is unlikely to help in the longer-term, while this will also impact international trade by triggering a global economic decline.

The question that remains is can this fate be avoided?  A period of calm would undoubtedly help the economy to consolidate and then recover, while the election of a more conservative, technocrat would also ensure that Italy remained in the Eurozone for the foreseeable future. This would usually seem the most likely course of events, but the Brexit vote and the election of Donald Trump as U.S. President highlight a distinct trend for nationalist and popularist movements in the modern age.