Wednesday, December 17, 2014 -
U.S. stocks surged on Wednesday as investors celebrated a rally in the energy sector and the Federal Reserve’s pledge to be patient in raising interest rates.
Stocks moved sharply higher on Wednesday, partly offsetting the steep losses posted over the past few sessions. A positive reaction to the Federal Reserve’s monetary policy statement contributed to the rebound.
The indexes saw an upside boost going into the close, ending the session near the best levels of the day. The Dow surged up 288 points (+1.7%) to 17,357, the Nasdaq soared 96 points (+2.1%) to 4,644 and the S&P 500 jumped 40 points (+2.0%) to 2,013. The NYSE finished at +2.05% and the small cap Russell 2000 at +3.11%.
Today’s rally was attributed to the Fed’s monetary policy statement, indicating that they should be “patient” – interpreted as putting off an anticipated interest rate hike until later next year.
But clearly, this celebration wasn’t felt globally as Japan’s Nikkei 225 Index rose by 0.4 percent, the German DAX Index edged down by 0.2 percent, the U.K.’s FTSE 100 Index inched up by 0.1 percent and the French CAC 40 Index rose by 0.5 percent.
This was a local “U.S.” intervention, I say – perhaps wanting some kind of a Santa Claus rally to dampen this strong selling.
Was it “Oil” or the “Fed”?
The stock market saw a strong rebound today – evidence of volatility in the opposite direction now – up. Initially, crude oil prices saw over a $2 rebound sending the energy sector up sharply before oil prices settled to only be up about 54 cents but the energy stocks largely kept their gains and that makes you wonder if we might be close to a key bottom in this free falling oil market at the $55 range. Oil closed at $56.47.
Later in the day the focus was on news coming out of the FOMC meeting and what the Fed had to say about interest rates. The Fed made a key change in their words, by dropping “considerable time” from its policy statement regarding how long interest rates would be kept at zero and instead added, “Based on its current assessment, the Committee judges can be ‘patient’ in beginning to normalize the stance of monetary policy.”
I am not really sure what the difference is between considerable time and how long “patience” is in normalizing the Fed’s monetary policy and this lack of clarity is exactly what the Fed is all about; keeping you guessing. This ambiguity about when the Fed would raise interest rates was just fine with the stock market helping to spark a rebound – or merely giving a good excuse for Fed/dealer bank intervention.
The Federal Reserve on Wednesday predicted inflationary pressures will diminish further in 2015 because of falling oil prices, but the central bank sees little change in its long-term inflation outlook when you strip out oil and food prices. You don’t have to be a Federal Reserve economist to figure out deflationary forces are at work after crude oil prices drop 45% in six months but we’ll see how long-term inflation does if depression-like deflation persists.
Persistent Global Weakness
The euro region looks to be most at risk of sliding into deflation early next year. Consumer prices rose just 0.3 percent in November, a far cry from the European Central Bank’s 2 percent target.
“Some countries are already in deflation. In Sweden, consumer prices dropped for a fourth consecutive month in November, prompting the central bank yesterday to commit to keeping its main interest rate at zero until the second half of 2016. Spain, which is at the mercy of the ECB’s policies, has seen deflation for the last five months, with prices dropping by 0.4 percent in November. Even in the U.K., where the economic recovery is relatively robust, figures yesterday showed inflation at its slowest in more than a decade, with November consumer prices rising just 1 percent.” Bloomberg
With numbers like these, it explains in part why commodity prices have taken such a hit over the last several quarters.
Crude Oil and the Dollar
Meanwhile, oil prices are so oversold on so many measures a bounce is expected at any time. There is only a week or two before the holidays are past so I look for oil prices to rebound at any time.
The part of the equation regarding crude oil is the U.S. dollar as crude oil is priced in the dollar. The dollar saw a steep jump today, which has become leverage for the Federal Reserve to help bring in foreign buyers for U.S. equities – courtesy of currency debasement in other countries.
As you can see this is one of the most powerful dollar advances this year, so this is a big reason why we had such a big up day in the stock market. This may seem counterintuitive, as a strong dollar is often associated with a weak stock market. But with the Federal Reserve on QE-Hold and other central banks printing their currencies (think Japan, ECB and China) this acts as a magnet for foreign investors to move money into the U.S. stock market, seeking to gain on asset appreciation as well as currency exchange rates.
As I pointed out yesterday we were also oversold on the McClellan Oscillator suggesting a bounce of some level was to be expected after a full week of steady declines – BUT – we are not out of the woods. The oscillator must get firmly back into the green zone and above zero.
Expect more pumping and dumping going forward.
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