Market Perspective for December 18, 2015

The Federal Reserve raised short-term interest rates by 25 basis points to fulfill most analysts’ expectations. Equities initially rallied on the news, but gave up those gains on Thursday and Friday.

The market started the week off with a strong rally as investors bought discounted shares following the recent sell-off. FedEx (FDX) released a positive report midweek, sharing optimism with the earnings market.  Shares of the firm rose 5 percent following better-than-expected quarterly results before retreating a bit on Friday. Revenues were boosted by the firm’s ground unit due to increased online shopping. The $2.58 earnings per share beat the consensus estimate of $2.51. The delivery firm also credited the success of e-commerce for its holiday success, which also signals trends for online retailers.  Oracle initially saw gains as the company delivered quarterly earnings per share that beat estimates, though revenues fell slightly.  As the week went on, however, the stock gave up its gains.

Economic reports delivered mixed signals. On Thursday, initial jobless claims fell, reflecting continued strength in labor markets. The Empire Manufacturing Survey extended its five-month decline, but the housing sector continues to confirm strength in the economy. Housing starts rebounded strongly in November and new building permits hit five-month highs.

The major drag on the markets continues to be commodity prices, especially crude oil. The price for the U.S. benchmark West Texas Intermediate crude fell to its lowest level in almost seven years, briefly trading for a bit over $34. Gold and copper futures also settled lower as investors are increasingly concerned that Fed rate hikes will lead to a stronger dollar and have a negative impact on already falling prices. On Friday, the providers of the China beige book, a private compilation of economic data from China, said they anticipate continued slowing of the economy in the current quarter. Earlier in the week, Chinese leaders said overproduction would be a major target of economic reform in 2016. If the government follows through with plans for mergers, reorganizations and plant closures to reduce production, demand for commodities could remain depressed for some time.

Bond yields spiked ahead of the Fed’s decision, but the 30-year and 10-year Treasuries declined following the move. The 5-year yield remains near its highest levels in 4 years, while the 2-year treasury broke out to a new high and is approaching a 6-year high.  High-yield bond funds opened the week with follow on selling, but the Monday lows held for the week. Investment grade bonds rallied on the week.

Emerging markets also rallied, while developed markets finished flat. The MSCI EAFE Index pulled lower by the Bank of Japan’s (BOJ) lackluster policy announcement. As with the European Central Bank in early December, it failed to satisfy investor expectations of more stimulus and the announcement backfired, sending the currency higher versus the U.S. dollar. The central bank said it will increase its annual purchases of ETFs by 300 billion yen, although it previously committed to buying 3 trillion yen worth of ETFs annually. The 10 percent increase was not enough to move the needle on investor expectations. As a result, the yen erased three days of losses and bounced more than 1 percent on Friday. After the euro rallied earlier this month, European Central Bank President Mario Draghi stated they could do more. We’ll see if BOJ Governor Kuroda makes similar comments over the coming days.

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