For the week ending December 11, 2015

Intra-day moves in equities markets last week could be characterised as “see-saw” each day, but ending the week decidedly negative. For the five days to December 11, the S&P Global 1200 Index was down 3.42 per cent; the US S&P 500 was down 4.81 per cent; whilst the Nasdaq was down 4 per cent. US dollar weakness against other major currencies was a major contributor to the underperformance of the US indices relative to the global index.

It was Opec’s decision to not set a production limit on oil that set things off. As a result, the oil price fell 11 per cent last week to just over $35 per barrel, the lowest since 2009.

Stock prices in the US energy sector sold off 6.5 per cent as a result but compounding this was a failure of a smaller cap US energy company that sparked a further sell off in the energy-heavy high-yield bond market.

Investors have been jittery in this sector for some time but accelerated their selling of lesser-quality debt ahead of tomorrow’s rate announcement by the Fed. Third Avenue Management froze redemptions of its high-yield debt fund while Lucidus Capital Partners liquidated its entire portfolio. As the sell-off in high-yield debt intensified, hedge fund Stone Lion Capital Partners also suspended redemptions. BIAS has never held high-yield (aka junk bonds) due to the expectation liquidity would very likely be a problem once interest rates head higher.

For the past five quarters markets have rallied in the first two months of the quarter but sold off in the final month of the quarter. We think this may be attributed to a number of factors but largest being the following question: “Can stock markets advance without quantitative easing and particularly in view of the imminent rate hike?”

We believe this is the overriding reason why we have this quarterly two steps forward but one step back movement. Although last quarter’s final monthly step was decidedly negative for the entire quarter, this quarter appears likely to be slightly positive to flat overall.

US economic fundamentals are positive and stock valuations appear reasonable, albeit not cheap. Global stock markets appear likely to close out the year in modestly negative territory as we are likely to have to wait six to nine months into 2016 before markets can demonstrate that they can advance regardless of modest tightening by the Fed.

Although markets have priced in a 25 basis-point hike, subdued inflation is a troubling impediment to diminishing the economy’s debt burden in addition to strengthening the dollar and undermining exports. Last week’s US dollar weakness supports the Fed’s intention to hike rates this week but inflation, under 1 per cent, does not yet justify a hike. We expect the Fed to surprise the markets with an eighth of a point hike instead.

Robert Pires is the chief executive officer of Bermuda Investment Advisory Services Ltd. He can be contacted at rpires@bias.bm