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US Bull Market In Question

Weak Performance of US Benchmarks Raises Eyebrows About Optimistic 2016 Forecasts

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Although the US Federal Reserve took the dramatic step towards raising rates for the first time since 2006, stocks have not responded positively to this development as evidenced by major benchmarks trading at a loss year-to-date.  With the top line shrinking for many publicly traded stocks, the drivers of growth might be absent in the coming year, weighing on stocks further.

S&P 500 Back in Negative Territory

After a rocky year, the benchmark S&P 500 equity index continues to disappoint investors, slipping back in negative territory year-to-date, trading down -0.12%.  With many of the component companies in the index already facing a revenue recession and growing debt levels concerning for the outlook, investor pessimism continues to reign supreme.  Although exhibiting a marginally positive 1-year return, current price action is not indicative of the strong bull market conditions championed by sell-side analysts.  With interest rates now set to rise, borrowing costs for corporations will also be on the rise, forcing companies to focus on investing in capital projects instead of using ultra-low rates to finance buybacks.  As a leading economic indicator, should the S&P 500 continue to weaken, it could suggest a broader recession for the US economy in the pipeline as concerns about the growth outlook mount.

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Yuan Weakened Further

Following up on the weakness in equity markets yesterday, Chinese indices have rebounded modestly, but failed to recover from most of the prior session’s losses.  In spite of the bounce in the indices, the offshore Yuan remains weak, with the People’s Bank of China opting to weaken the currency to the lowest levels versus the dollar since the massive spike in August.  The Yuan is likely to continue the current path as policymakers see this as a means to keep the currency competitive amid a continued deceleration in global trade.  With the dollar forecast to continue appreciating, the Chinese have a vested interest in further reducing the Yuan’s pegged value in an effort to avoid losing market share to other regional exporters.  However, this is a costly endeavor as evidenced by the drawdown in foreign currency reserves and sales of Treasury holdings.

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Saudi Arabia to Keep Pumping

Amid expectations that oil prices might slide to as low as $20 per barrel in the short-term based on persistent supply pressures, oil producers continue to pump at a breakneck speed to fill the gap left by lower prices.  Gulf countries in particular are most sensitive to changes in prices as oil revenues are critical to balancing local budgets.  Oil prices in a bear market have particularly hit Saudi Arabia which depends on oil industry revenues to engage in social spending and protect subsidies.  However, as the latest government budget data shows, the country has run a $98 billion deficit in 2015, leading to the announcement of sweeping changes and reforms.  In a bid to slash spending, the government is focusing on cutting subsidies, opting to raise the price of refined energy and electricity.  Both Brent and WTI remain below $37 per barrel at the moment, trading modestly higher overnight.

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Ruble Hits Multi-Month Lows

As Russia continues to increase its involvement in the Syrian conflict, domestic economic conditions continue to deteriorate as evidenced by the sustained weakness in the Ruble.  USDRUB fell to the lowest level since December of 2014 amid a continued contraction in the economy marked by stubbornly high inflation.  Interest rates remain elevated, with the key rate currently at 11.00% as the Central Bank attempts to temper inflationary pressures.  While the Ruble devaluation has helped the Government maintain a relatively balanced budget amid the rout in oil prices, for average citizens, sanctions are hurting the quality of life just on the basis of rapid price inflation, leading to less favorable import conditions.  Even still, Russian oil production has recently hit the highest levels since the fall of the Soviet Union, showing that Russia is still able to duck some of the impact from economic sanctions. 

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