Fears that the global economic recovery is stalling came to a head in the past week. The World Bank significantly reduced its 2015 and 2016 global growth forecasts and economically sensitive copper plunged to the lowest level in more than five years during the week. Disappointing retail sales also heightened concerns over whether the U.S. can remain immune to the global economic malaise.
Markets were already on edge when the Swiss National Bank stunned investors on Wednesday night by scrapping its long-standing pledge to limit the value of the Swiss franc to €1.20. The move set off wildly volatile trading in foreign currency markets, including a nearly 20% plunge in the euro relative to the franc. Rumors of large losses among hedge funds and currency brokers, along with associated margin calls, created extreme market volatility in the hours following the announcement, all of which seemed to stabilize by the week’s end. Strategists speculated that the Swiss moved because they had been tipped off that the European Central Bank (ECB) will announce a large-scale quantitative easing program at their January 22 policy meeting.
For the week, the S&P 500 dropped -1.24%, the Dow Jones Industrial Average fell -1.27%, and the MSCI EAFE (developed international) gained +1.5%.
Here are the 3 stories this week that rose above the noise:
ECB May Deliver $635 billion Bond-Purchase Program
This week The European Central Bank (ECB) is likely to announce a €550 billion bond-purchase program this week and won’t skimp too much on the details, economists say. ECB President Mario Draghi will make his biggest push yet to steer the euro area away from deflation by announcing quantitative easing on Jan 22. The median estimate of the size of the package tops €500 billion and anything less may prove disappointing to markets given current high expectations.
Energy Holders at Risk as Bank Loans Ebb
A Financial Times article details the impact that plunging oil prices may have on the ability of oil and gas companies to borrow from banks. As explained in the article, the bank borrowing of oil and gas companies is normally refinanced in April and a tightening in bank lending would increase the reliance of energy firms on the high-yield bond market.
As a result, energy bonds and high-yield credit in general may remain under pressure into the spring barring a sharp rally in oil prices.
Why a Big Swing in Jet Fuel Costs Brings Small Change to Airfares
Jet fuel prices have dropped significantly in the last 12 months, but the cost of airline tickets has only dropped marginally. Over the last year, airline prices have dropped by only 4.7%, compared to a 23.5% decline in the price of jet fuel. There are a handful of reasons why airline tickets have only dropped by a small margin compared to jet fuel prices.
According to the trade group Airlines for America, fuel costs only account for 26% of the ticket price. The additional costs for airlines, including taxes and labor costs, have been flat or rising. Additionally, airlines don’t always pass cost savings from a drop in jet fuel prices to the consumer. Instead, they allow for an increase in profits. On the other hand, when fuel prices rise, it negatively impacts profits for airlines because airlines are unable to pass all of the cost increase to the consumer. For example, when fuel prices rose by 75% between March 2009 and March 2010, airline tickets only increased by 7.5% over that time span.
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.
