3/16/16

Central bank posturing has put a bottom in oil and stocks in the past month.  Rising stocks and oil, in this environment, have a way of restoring sentiment and the stability of global financial markets.  Those efforts were underpinned by more aggressive stimulus from the European Central Bank last week.

And the Fed furthered that effort today.

Just three months ago, the Fed projected that they would hike rates an additional full percentage point this year.  Today they backed off and cut that projection down to just 1/2 percent (50 basis points) by year end.

That’s a big shift. In the convoluted post-QE, post-ZIRP world, that’s almost like easing.

What’s happened in the interim?  Janet Yellen was asked that today and said it was: Slowing growth in China … A negative fourth quarter GDP number in Japan … Europe has had weaker growth … and Emerging markets have been weighed down by declines in oil prices.

Aside from the negative GDP print in Japan, none of these were new developments (even Japan was no shocker).  Meanwhile, during the period from the Fed’s December meeting to its meeting today, oil did a round trip from $37 to $26 and back to $37.

So what happened?  It appears that the Fed completely underestimated the threat of weak oil prices to the global economy and financial system.  We’ve talked extensively about the danger of persistently weak oil prices, which, at sub $30 was pushing the world very close to the edge of disaster. That threat became very clear in late January/early February, culminating when the one of the biggest oil and natural gas companies in the world, Chesapeake, was rumored to be pursuing the path of bankruptcy (which was of course denied by the company).  It was that moment, it appears, that policymakers woke up to the risk that the oil bust could lead to another global financial crisis — with a cascade of defaults in the energy sector, leading to defaults in weak oil exporting countries, spilling over to banks and another financial crisis.

Today’s move by the Fed, while confusing at best, led to higher stocks and higher oil prices.  The market has been pricing in a much more accommodative path for the Fed for the better part of the past three months, and today the Fed dialed down to those expectations (i.e. they have now followed the ECB’s bold easing with some easier policy/guidance of their own), which should provide more fuel for the stabilization of financial markets and recovery of key markets (i.e. the continued bottoming of key industrial commodities, more stable and rising stocks and aggressive recovery in oil).

Were they just that wrong, or are they doing their part in coordinating stimulus from last month’s G20 meeting?

Bryan Rich is a macro trader and co-founder of Billionaire’s Portfolio. If you’re looking for great ideas that have been vetted and bought by the world’s most influential and richest investors, join us at Billionaire’s Portfolio.