Risk Markets Weaken in Advance of the Fed Meeting This Week

December 14, 2015

Risk Markets Weaken in Advance of the Fed Meeting This Week Photo

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.

Tags: Monday Morning O'Malley | Oil | Federal Reserve | Credit spreads | Fed tightening

< Go to Monday Morning O'Malley

This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client.  Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications