It may seem of late that even a small interest rate hike by the Federal Reserve Bank can cause a ripple effect in world markets. Or maybe it’s just the threat of the rate hike that is creating havoc across the globe.
Higher interest rates help strengthen the dollar which in turn brings the price of most commodities down. Or so it seems of late.
Oil Prices Drop
The impact of a possible June rate hike, signaled by the minutes of the April 26-27 FOMC policy meeting, was felt immediately, pulling oil prices down from its recent 2016 highs and snapping a two-day rally on Wednesday.
Before the release of the minutes, Brent and U.S. crude's West Texas Intermediate futures had advanced closer to $50 a barrel after large gasoline and distillate drawdowns were announced by the U.S. Energy Information Administration (EIA). But minutes after the news was announced, late afternoon trading of oil sent the dollar rallying against a basket of currencies and the crude benchmarks into negative territory.
Brent crude settled down 35 cents at $48.93 a barrel after coming in earlier to within 15 cents of striking the $50 target coveted by oil bulls. That session's peak of $49.85 was the highest for Brent since November. WTI closed down 12 cents at $48.19 a barrel after reaching $48.95 - its highest level since mid-October.
Oil prices are up about 80 percent or more from 12-year lows of around $27 for Brent in January and about $26 for WTI in February. The rebound has been fuelled by declining U.S. crude output, a wildfire that has restricted Canadian oil exports to the United States and outages in Libyan and Nigerian supply.
Gold Prices Down
Another commodity is also being hit by the possibility of a Fed interest rate hike. Gold fell more than one percent on Wednesday after the dollar hit its new three-week high. Gold is usually seen as a hedge against inflation and is highly sensitive to rising interest rates, which increase the cost of holding it.
Gold bullion rallied 20 percent this year on speculation that the Fed was slowing its expected pace of rate increases and would be postponing the implementation of another hike until later in the year. Talk of a June increase is sending the prices down further.
Spot gold dipped to a session low of $1,262.45 an ounce after the news and was down 1.28 percent at $1,263.2, while U.S. gold futures settled down 0.2 percent at $1,274.4.
Equity Markets
Equity traders should also be concerned about the next rate increase. Goldman Sachs has downgraded Europe and Japan equities to "neutral" over the next 12-months saying that valuations are at peak levels and that there is no particular reason to own them. Instead, Goldman suggests putting money in the less stretched credit instruments especially those in the high-yield segment.
A survey conducted by the Bank of America-Merrill Lynch for May found that in April, global fund managers had cut their allocation to equities from a net 9 percent overweight to a net 6 percent overweight and that U.S. equities dropped to a net 18 percent underweight from a net 10 percent underweight last month, marking the 15th straight month that fund managers were underweight the segment.
The survey also found that Japanese stock allocations were at their lowest level since December 2012--at a net 6 percent underweight and that euro zone equities allocation fell to a 17-month low of net 25 percent. Allocations to U.K. equities dropped to a net 36 percent underweight, the lowest since November 2008.
Not oil, not gold, not equities---what’s left for an investor’s money?