Last week we saw the fed deciding not to raise rates. Many are saying that this is not important, that 0.25% doesnt make the difference. Lets analyze why it does matter.
1) After 2008, the only way to recapitalize companies was to give free money away, thats why they implemented almost zero-interest rates. At first, it went all well, growth went at the same pace than prices. But right now, we are seeing an scenario were everything is expensive, the everything bubble market. They know this, and they take advantage of it, why are we going to raise rates if any other investment is also bad? The problem is that the further they keep rates low, the bubble increase in size. I have to recognize this to trump, which stated that the fed is only taking a political decision, with the clear example he said for instance, REIT companies are having a party with this kind of rates.
2) Then we have the oil market, where an agreement to cut the glut has been already on the table for over a year and who knows if they will finally agree on something.. We know that US has an extraction cost of $ 38 per barrel (average) , if they increase rates, dollar will tend to valuate, pushing oil lower, yes, overtime it will tend to find its real value upon costs, but in the meantime it would create a huge turbulence.
3) Emerging markets such as brazil or argentina are already on a very high interest rate, if rates were increased and yield-to-maturity increases on the US, this will be directly reflected on this goverments which will cause turbulence also there
4) The stock market in the US is highly overvalued, yes of course you will find one or two stocks which are with good valuation, but overall their not. If you are a fed supporter, then you know that yellen said to expect a 1% grow on a year basis, the question is, do you think that companies and earnings will grow at the same basis? what about stock prices?
5) Add to the stated arguments, that if they raise rates, and there ir turbulence in the market, DB will face much bigger consequences because of its high exposure.
The most recent quarter, we saw many companies surprise on earnings release, but there is something important to notice.. they surprise cause expectations where low, on a YoY basis, they werent so good. As a conclusion, They have to increase rates, but nobody wants to do it cause the guilt will fall on them. I see a correction at least to 198.65
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Update:
So it seems like there is finally a small agreement to put a stop on the glut, we should be watching out towards iran and russia attitude, since they didnt agree on anything, they may just fill the missing barrells. We have to watch out for the possible impact of hurricane matthew on florida, which can cut the production of barrels on the south east.
The fundamentals presented originally are still the same, little upside but a huge downside potential. From a technical point of view, this is how we are standing right now, we should watch out for a break on a simmetric triangle, if it does, it will also lead to a break on the trendline that has been developing since february.
The USA would not cope with raising rates as theirs debt is unbearable. The only thing fed can do, just to raise rate a bit to shake the market and to show at least some presence of the control. The good option would be to devalue the currency which is impossible to do with that kind of price for the crude oil. So there is a way and now they and we know what to do, to make the barrel fly. Very easy, as usual USA does. Just occupy the oil production country. The same as happened in Libya in 2011 and do not forget killing the governor (just in case) to put county in chaos. You can check yourself, just look through the US debt and compare with the chart for oil. Only there USA could borrow more, when oil price soar and it would be possible to raise rates.
Trance-Man
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Can you update this chart with your current thoughts? Thank you, good work sir!
GabrielMellace
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Thank you! i just updated the idea, most of the fundamentals are still on their way, but there are interesting things to see from a technical point of view!