Continued weakness in commodities prices, especially oil, continues to weigh on the equity and credit markets in advance of the Federal Reserve (Fed) meeting this week.
Oil prices made new lows last week, trading around $36, down approximately 10% for the week. The weakness in commodities has had a significant impact on the credit spreads of companies in the energy and metals and mining sectors. Spreads for both sectors continue to underperform despite seeing more bondholder-friendly activity from these companies, like reductions in their equity dividend and capital expenditure reductions. Some low investment grade rated bonds (BBB-) are trading at valuations closer to single-B rated junk bonds. I expect this pressure to continue until commodity prices stabilize. Both emerging market and domestic equity markets also experienced weakness last week. Emerging markets were roughly 6% lower and the S&P 500 down 3% for the week.
This week, I expect the Fed will increase the Fed Funds rate by 0.25% in its first increase in a decade. The global implications of the Fed tightening of monetary policy will likely take several weeks to play out, but I expect market volatility to remain elevated into year-end, especially as overall market liquidity is low. My thoughts on positioning are short on U.S. and international equities and neutral on fixed income duration with a curve steepening bias.
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