Heads I Win, Tails You Lose

KINGSTON, NY, 30 September 2015—The Summer of 2015 is one for the financial record books. Since the Shanghai Index began melting down in mid-June, equity markets have been battered, commodity prices plunged and currencies of resource-rich nations and emerging markets tested old lows and hit new ones.

As conditions deteriorated, the financial world focused on 17 September when the Federal Reserve Open Market Committee (FOMC) would announce if it would raise interest rates for the first time since 2006, or maintain its Zero Interest Rate Policy which has been in place since late 2008. In response to the Fed’s decision not to raise rates due to concerns that China’s economy was slowing and the global economy risked falling into recession, equity markets, commodities and currencies resumed their downward slide.

Then, just one week later, Fed Chairwoman Janet Yellen, speaking at the University of Massachusetts, signaled that the Fed intends to raise rates this year. In response, global equity markets, after a brief upward spike, continued their downward spiral along with commodities and currencies. 

Perfect Non-Sense

Thus, when the FOMC initially announced in mid September they were continuing ZIRP, markets dramatically declined. Then, one week later, when the Fed chairwoman insinuated the Fed would raise short-term rates, equity markets continued to decline, commodity prices continued to fall and, as 20 foreign-exchange rates hit record lows, currencies continued to plunge.

And for good reason: The higher US interest rates go, the more concerned countries and companies become over their ability to pay back massive debt load accummulated when ultra-low interest rates and cheap money fueled the borrowing boom, stock buybacks, record merger and acquisition activity, and the bond market frenzy.

However, the Fed’s 17 September decision not to raise rates in view of a slowing global economy continues to be supported by data. For example, Japan’s government announced this week industrial output fell 0.5 percent in August, down for the second straight month. On the market front, Tokyo’s exchange has lost 16 percent since the end of June, the most since the Panic of ’08.

Overall, MSCI’s All-Country World Index is down 11 percent since June 30, the sharpest slump since 2011, while its Emerging Markets stocks benchmark has fallen 20 percent in the past three months.

And also this week, The International Monetary Fund warned that with corporate debt of non-financial firms in emerging markets ballooning from $4 trillion in 2004 to $18 trillion in 2014, “Emerging markets should be prepared for corporate distress and sporadic failures in the wake of monetary policy normalization in advanced economies.” And, according to the Institute of International Finance, investors have pulled $40 billion out of emerging markets in the third quarter, the fastest pace since the height of the ’08 Panic.

Trend Forecast: Expectations are for the Fed to raise rates in December. Given the hard data of a global slowdown and IMF warnings, we maintain our forecast for a major equity market correction by year’s end.