Weekly Market Recap – March 21st

Oil prices have seen some wild swings in the last month, rallying to a peak of $130 last week before falling to around $100 now. Bloomberg Economics estimates that perceptions that the severe supply crunch could ease contributed $22 to the decline. The remainder was due to demand concerns amid surging Covid cases in China.

Since the beginning of the year, rates have established a very clear upward trend. With the Fed’s intention to raise rates, aggressive inflation, and geopolitical tensions, rates on all maturity terms have seen an aggressive sell off.

Nothing has been more concerning lately as the flattening between the 2 and 10-year bond yield. Historically this has been a telling sign of a recession in the short term.

Dethroning the dollar is easier said than done. That’s the conclusion of investors after Washington’s freeze of Russia’s dollar holdings created fresh impetus among central bankers to rethink the security of access to foreign-exchange reserves. The move fueled speculation that countries such as China could redouble efforts to unshackle itself from greenback-denominated financial systems and look for alternatives. The U.S. currency makes up around 60% of central bank foreign-exchange reserves despite efforts to steadily reduce dollar holdings, according to International Monetary Fund data. 

Hedge funds slashed their bullish bets on West Texas Intermediate crude prices to the lowest since April 2020, when lockdowns and grounded flights plunged the oil market into an unprecedented crash. Money managers’ long positions on the U.S. oil benchmark fell 6.4%. The retreat suggests that the wild swings across the oil market since the war in Ukraine started were partly caused by a liquidation of wagers.

The Federal Reserve raised interest rates by a quarter percentage point and signaled hikes at all six remaining meetings this year, launching a campaign to tackle the fastest inflation in four decades even as risks to economic growth mount.

Economists predicts the Fed could end up lifting rates to as high as 3.25% sometime next year, which would be the highest since 2008. Policy makers now see their longer-run federal funds rate at 2.4% versus 2.5% in the December forecast.

If recent history is any guide, U.S. equity investors shouldn’t be too worried about the Federal Reserve’s decision to kick off its most aggressive rate-hike campaign since the mid 2000s. Between June 2004 and June 2006, the Fed raised interest rates 17 times, from 1% to 5.25%, while the S&P 500 index posted gains of about 12% over the same period. 

The 2015-2018 monetary tightening period was even more positive for risk assets, with the S&P 500 gaining about 21% as the Fed raised rates 9 times between Dec. 2015 and Dec. 2018 from 0.25% to 2.25%.