Friday December 18

Stocks fall to end the week for the second straight day of losses following the Fed’s rate rise. The S&P500 lost 1.8% to 2,005 while the Dow Jones fell 2.1% to 17,128. The S&P500 lost 0.3% on the week while the VIX rose above 20 today to indicate higher levels of stress in the markets. The oil market is continuing its slide which is contributing to negative sentiment across markets. Brent oil today fell 0.5% to $36.88 taking its weekly loss to 2.8%. The Bank of Japan increased its stimulus program which contributes to the trend of monetary policy divergence. The dollar rose against the yen as high as Y123.58 following the announcement. The euro rose against the dollar to $1.0841, and the dollar index eased back 0.6% to 98.70. The two year yield fell to 0.95% while the ten year yield lost 3 basis points to 2.20%. Gold prices also rose. Looking at movements in Treasury yields, gold, and the US dollar these movements seem to be counterintuitive in the immediate aftermath of a Fed rate hike.

Some interest rates fell in spite of higher interest rates at the Fed. The Fed’s overnight interest rate reached 0.35% which is in the targeted range of 0.25 to 0.50%. In spite of this increase yields on Treasuries across the yield curve from one month forward have fallen. This market response is outside of the Fed’s control and is counterintuitive to their policy action on Wednesday. Demand for Treasuries is coming from international investors who want safe assets amid slower global growth, as well as regulatory changes that are causing financial institutions and money market funds to hold more Treasuries. Market rates on everything from home mortgages to credit card loans and bonds must rise to truly reflect tighter monetary conditions as is the Fed’s goal. The Fed may have to act more dramatically given the extent of prior easing and current global economic conditions. Over the past few days money market yields have risen and private overnight repo rates have risen from 0.4% to 0.45%.

The Argentinean peso depreciates after the central bank lifts currency controls. Yesterday the peso traded at 9.8 against the US dollar however today it fell to 13.9 pesos per dollar. This development is most detrimental to multinational companies with Argentinean operations, Argentinean entities with debt denominated in dollars, as well as Argentinean citizens who wish to spend their money abroad. The peso fell 26% in one day and brings the year to date losses to 36%. The floating currency will now hopefully boost agribusiness in the country since goods and products will be more competitive. Similarly the central bank hopes that a floating rate and greater transparency will restore investor confidence as markets will be more open. The benchmark interest rate has risen to 38% as inflation has spiraled towards 25%. The peso is expected to depreciate further and the country has low foreign exchange reserves and therefore will be limited in its attempts to exchange dollars for pesos in the open market to support the peso.

The Bank of Mexico tightens monetary conditions for the first time since 2008. It raised the overnight rate by 25 basis points to 3.25%. The move was very much expected by markets, as the Fed’s action could have resulted in an unfavorable depreciation to the Mexican peso. The consequence may be a higher borrowing cost for households and companies down the road. However in the near term it is expected that banks will not pass on higher interest rates to consumers immediately. Banks will bear the increase to net interest income in order to preserve market share since margins on loans and mortgages are still attractive from the banks’ perspective.

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Friday December 18

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