Last week was volatile for global equities, ending with the Dow Jones Industrial Average falling 315 points on Friday to bring its weekly loss to 3.8%. This was the worst weekly loss for the Dow on a percentage basis since September of 2011 and was driven by a continued meltdown in the energy sector. Fears of a sharp global slowdown continue to be fed by the steep drop in oil prices, which many investors believe is at least in part attributable to a weakening economic outlook.
However, some positive domestic data came from Thursday’s retail sales data, which indicated that the plunge in oil prices over the past three months is generating a boost to consumer spending heading into the holiday shopping season. Retail sales (minus gasoline) surged 6% in November on a year-over-year basis, the most in nearly three years.
For the week, the S&P 500 dropped -3.52%, the Dow Jones Industrial Average fell -3.78%, and the MSCI EAFE (developed international) lost -3.54%.
Here are the 3 stories this week that rose above the noise:
Why Russia's Monster Rate Hike Spells Trouble Ahead
Early Tuesday, the Central Bank of Russia (CBR) hiked its key interest rate by 650 basis points to 17%, the sixth rate increase this year. The impact was immediately reflected in the Russian ruble which plunged about 12%, bringing its loss against the dollar to nearly 50% this year.
The rate hike and falling currency will further threaten financial stability in the troubled economy which has faced the double whammy of collapsing oil prices and the specter of new U.S. sanctions. Ordinary Russians are feeling the squeeze as consumer price inflation is forecast to reach 10% by the end of the year.
Similarities and Differences Between Now and 1998 Emerging-Market Crisis
In recent weeks, there has been a flight of foreign capital fleeing emerging markets creating fears of a full-blown currency crisis and a resulting financial market contagion similar to what happened in 1998. A recent Bloomberg article provides a nice summary of the similarities and differences between now and 1998. Despite some concerning similarities, the article details a few important differences which suggests the odds favor a somewhat less severe outcome than the 1998 experience.
These key differences include many emerging countries holding much larger foreign reserves than in the 1990's, as well as now issuing most debt in local currency rather than U.S. dollars. These changes should increase the odds that most countries will weather the current currency volatility and capital outflows, without experiencing a crisis on the scale of 1998.
One Hundred Years of Bond History Means Bears Destined to Lose
A Bloomberg article offers some longer-term perspective on bond yields suggesting the era of high inflation and interest rates that occurred in the 1970's and 1980's was an aberration. With the longest-dated U.S. Treasury bonds now yielding less than half the 6.8% average over the past five decades, it’s not hard to see why forecasters say they're bound to rise as the Federal Reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history. Yet, compared with levels that prevailed in the half-century before that, yields are in line with the norm.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
