Fed Holds The Course and Signals No Rate Cuts in 2020
The U.S. Federal Reserve is not going in for an interest rate cut this time...and possibly for most of the new year, citing persistently low inflation. For stocks, this news helped the Dow gain 30 points, while the S&P saw an 8 point rise as investors felt reassured by the Fed’s ‘wait and see’ approach.
What does that mean for equities in the new year? First off, interest rates are low – 1.5% to 1.75%, meaning that borrowing costs using the benchmark rates are also low. These low rates mean that investors can take on more money, with comparatively little risk, unlike if rates were higher. Everything else aside, it could mean stocks are on their way to prolonging this year’s bull run.
So the Fed isn’t worried about a recession? There's still a risk on the horizon, but experts say that that horizon is now 18-24 months away – meaning that so far, the Fed is more or less positive on growth. On the other hand, the next U.S. presidential election will happen in 2020, and there’s no telling how markets will react.
What about the trade war? There’s still the chance of a last-minute deal, but that’s looking increasingly unlikely as Dec. 15 draws nearer, though there’s still a faint hope that the deadline is pushed back. Meanwhile, the Fed itself is signaling that it will no longer factor the trade war into its decisions, but it isn’t clear if they’ll be able to stick to that policy.
Wut We Think: While the Fed news did give markets a slight boost, all eyes are now on the December 15 deadline – if a deal is reached, or even if the deadline is pushed back, then markets will have cause to rally higher. However, if the tariffs are applied, and tech giants like Apple take the hit – then we may go into the last stretches of the decade in a slump, regardless of the Fed.
Aramco Launches World’s Largest IPO But OPEC Production Still Faces Cuts
The former Arab-American Oil Company is now the largest listed company in the world...with a valuation of $1.88 trillion on its IPO, which saw its stock close at 10% above the listing price. But OPEC is still aiming to reduce production by half a million barrels a day, in an attempt to bolster oil prices, which have been sliding due to non-cartel supply. Oil prices fell to $63.66 before recovering to $64.84 – about $10 lower than 2019’s peak of $74.56.
Weren’t they cutting production to boost oil prices before the IPO? Why are they still cutting production? Even with Aramco’s historic IPO, low oil prices put budgetary pressure on OPEC countries – though it’s not clear how effective the cuts will be, given the booming U.S. production.
So U.S. production will overcome OPEC cuts? That’s the forecast, coming from OPEC themselves. But though supply and demand are both forecasted to grow, that’s not taking into account any possible demand shocks – an escalation of the trade war or a faster slide into a recession that is predicted.
And low oil prices aren’t just hurting OPEC: Chevron, the second-biggest oil company in the United States, is slashing its asset value by $10 to $11 billion due to booming inventories. With the U.S. now the world’s biggest oil producer, it’s no surprise that U.S. oil companies are turning into the victims of their own success.
Wut We Think: Oil prices will probably rise following the Aramco IPO as Saudi Arabia pressures its OPEC partners into strictly conforming with the quota – but that will mostly depend on – in oil just like equities, crypto, and bonds, in short, everything – progress in the U.S.-China trade war. With demand being kept low due to trade war uncertainty, a move one way or the other will be enough to solidify trends until at least the end of the year.
Trading Spotlight: LIBOR
The London Interbank Offered Rate may sound esoteric, but it is one of the more important numbers in global finance, having a wide-ranging effect on equity and credit prices around the world – much like the U.S. Federal Reserve’s benchmark rate. Keeping an eye on LIBOR can help traders predict shifts in stock prices, with lower rates typically signaling higher prices, and vice versa.
LIBOR: LIBOR, or officially ICE LIBOR, or the London Interbank Offered Rate, is the average lending rate at which major banks do short-term lending to each other. 17 major banks in London contribute to the rate, which is widely used as a benchmark for many other financial products. Despite LIBOR’s importance, it has been manipulated in the past and has triggered a string of lawsuits due to this manipulation. LIBOR administration is now handled by ICE – the private InterContinental Exchange also responsible for cryptocurrency products such as the Bakkt bitcoin futures.