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Stocks Tumble As Oil Prices Continue To Plummet

Market Digest – Week Ending 12/12

Plummeting oil prices spooked investors and led to a broad sell-off in equities and a flight to high quality bonds. The price of crude fell 12% for the week and is now 43% below a yearly high reached in June. Interest rates on Treasuries hit lows for the year, with the 10 year yield at 2.1% and the 30 year at just 2.8%. Ten year German Bunds are now yielding just 0.6%. A call for early elections in Greece prompted a large drop in Greek equities. It is difficult to attribute how much of the week’s decline was related to concerns of a reignited European credit crisis.

Weekly Returns:

S&P 500: 2,002 (-3.5%)
FTSE All-World ex-US: (-4.9%)
US 10 Year Treasury Yield: 2.08% (-0.22%)
Gold: $1,221 (+2.5%)
USD/EUR: $1.246 (+1.4%)

Major Events:                 

  • Monday – Greece’s government said it would accelerate a parliamentary vote for president to December 17, which could decide the future of the bailout program.
  • Monday – Japan’s Q3 GDP shrank 1.9%, more than previously estimated.
  • Wednesday – Russian Prime Minister Medvedev addressed the nation and urged calm regarding the falling currency and rising prices.
  • Thursday – Marketplace lending platform Lending Club had a successful IPO, valuing the company at over $8 billion.
  • Thursday – China’s central bank is pumping about $65 billion into the country’s banking system, according to government sources.
  • Friday – Senate leaders were working to pass a spending bill to fund the government through September. A similar bill was passed by the House a day earlier.

Our take:

In industry terms, the “yield curve” is a visual representation of the relationship between bond interest rates and maturity. Typically, investors demand higher yield for longer maturity bonds. The curve is considered steep when the gap is wide and flat when it is small. Occasionally, the curve even becomes inverted.

It just flattened for an 8th straight week. Five year Treasuries now yield 1.53% while 30 year Treasuries yield 2.76%. The spread is the lowest in six years, meaning the market is very confident inflation and interest rates won’t rise significantly for a very, very long time.

Traditionally, a flat yield curve has been bad for the economy. Banks make more money on loans when the yield curve is steep. But things change. Bigger companies are able to access the debt markets directly at very competitive rates. Small businesses face challenges, but with most depositors earning nothing, banks are still willing to lend. A new group of companies is planning to do for business lending what Lending Club did for consumer lending – make banks largely unnecessary. It’s too early to say they will succeed, but a flat yield curve on its own may no longer be as scary for the economy.

The bigger question is how long governments globally will be able to keep printing money to borrow more from themselves at lower and lower rates. Almost no one wanted to own long duration bonds this year. The market proved them wrong, as it loves to do. A 30 year Treasury bond has returned about 25% this year. Plummeting oil prices suggest inflation will remain low and the party may continue. No one knows when it may end or how bad the hangover may be.

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