Markets Begin Hesitant Recovery
by Daniel Gordon
After a tumultuous January, a modest recovery has taken place in February and March in several key economic sectors. Equity markets in the United States (US) have rebounded and central bank policies have probably improved the outlook for growth, exports, and investment. The commodities market and energy sector, coming off record lows, provide another reason for cautious optimism. Nevertheless, despite these reasons for confidence, global growth in 2016 will remain subdued.
The equity markets in the US have led the way in the recent recovery. The S&P 500 Index in particular has recouped all of its January losses. According to a March 19 Wall Street Journal article, the S&P 500 has enjoyed five weeks of gains. The Dow Jones Industrial Average is also posting positive gains for the year, after taking a major hit in January.
A more dovish tone from the Federal Reserve (Fed) has likely improved market sentiment. In January, many economists believed that the Fed would raise rates four times in 2016. More recent signals from the Fed, however, suggest that there will be only two more rate increases. Easy monetary policy in the US will make the economic environment more conducive to growth.
As a result of the Fed’s announcements, the dollar has also begun to weaken slightly relative to the Euro, the Yen and other major currencies. A lower-than-expected interest rate environment in the US has lowered the price of the dollar in currency markets. The weaker dollar may slightly boost US exports, especially in the manufacturing industry.
Outside of the US, foreign central banks have implemented negative overnight interest rates to spur investment. Switzerland, Denmark, Sweden, Japan and the European Central Bank are all offering negative interest rates. Switzerland is the lowest, at -0.75%. Many government bonds are also at new lows. The Japanese 30-year bond is at 0.458%, a record low. The Italian five-year bond is also at a recent low, at 0.285%. Lower interest rates and bond returns in developed markets should theoretically increase investment elsewhere, although the real effect will probably be to soften the downturn that many economies are facing.
The commodities market is also marginally improving. The Continuous Commodity Index, made up of seventeen commodity futures, rose to 19.13, following a low of 17.50 in January. The market is still very weak, but the worst of the commodity crisis seems to be over. Metals, including iron ore, copper, and palladium, also appear to be recovering.
In the energy market, according to Bloomberg Business, Brent Crude oil prices have risen about 40% after falling to a record low of thirty dollars in March. West Texas Intermediate crude oil futures also rose above forty dollars per barrel. Although Brent oil prices have since dipped below forty dollars, the rise suggests that oil prices may have bottomed out. An output freeze, rumored to be on the agenda for upcoming talks held by the Organization of the Petroleum Exporting Countries (OPEC), will do little to raise prices, since most producers are already near full capacity. Low oil prices are probably here to stay for the medium term, but the freefall in oil has been arrested.
Nonetheless, the energy market faces considerable restructuring ahead. Bank of America shows that high yield energy bonds in distress—those that have spreads higher than 1000 basis points—now account for about 70% of the market. That is the highest distress percentage in at least fifteen years. Moreover, lower oil prices have edged out many US producers involved in the fracking business.
Global growth will remain sluggish. The International Monetary Fund (IMF) estimates that global growth in 2016 will be 3.4%. In recent years, emerging economies have fueled global growth; but in 2016, the IMF believes that the US will be more of a driver of global growth, contributing 21% of global growth. This number, the highest US contribution to global growth since 2003, suggests slowdowns elsewhere in the world economy. If the world economy is to grow with any force in 2016, or even reach the IMF’s predictions of growth, other economic powerhouses besides the US, such as Europe and China, will have to pick up the slack.
Daniel Gordon in a junior in Stiles College. You can contact him at email@example.com