Tag Archives: interest rates

Event Recap: “What’s next for Commodities”

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By Joseph G. Ogega, a student in Financial Mathematics at the University of Minnesota and CFA level I candidate.

On February 15 CFA Society Minnesota hosted a presentation by Robert P. Ryan, SVP of Commodity & Energy Strategy at BCA Research. Bob comes with more than 30 years of experience in options market and trading. Prior to joining BCA as an ME in 2014, he worked at New York Mercentile Exchange, as a Senior Economist and Director of Options Research, Commodity markets.

Bob discussed how some macroeconomic factors and policies in key global economies impact supply-demand dynamics in commodities’ market. According to him, OPEC producing countries led by Russia and Saudi Arabia will most certainly maintain their production levels for the remainder of the year. “The demand for crude oil and other refined products is expected to spring up or at least be steady in 2018 through 2019, as a result of significant growth rates registered in approx. 75% of countries monitored by the IMF,” he said.

Global supply of crude oil is expected to increase on average by 1.98mm b/d leading to 99.64mm b/d in 2018, hence U.S. shale-oil production rising by 1.15mm b/d leading global growth. Coincidentally, global demand is also expected to increase by 2mm b/d in 2019 from 100mm b/d in 2018.

“In 2019, global crude and liquids supply will average 102.22mm b/d (+2.58mm b/d), led again by surging U.S. shale-oil production (+1.39mm b/d). “ (view graph here, slide 4)

 

He also believes that the recent move by the Fed to raise interest rates will boost crude oil prices as a result of appreciation of the USD. (view graph here, slide 9) This effect will be felt more in the second half of 2018.

The rapid decline in Copper prices -between 2011 and 2017- is believed to be due to China registering slower growth over the same period. However, with a strengthened USD, Bob believes that the market will be able offset the supply shortfalls.

China, have since implemented monetary and environmental policy reforms aimed at encouraging importation of high-grade ores over low-grade ores. Though this has caused a depression on steel prices, China remains the biggest global consumer of iron ores. Australia and Brazil have also adopted similar domestic policies.

As a parting shot, Bob strongly believes that the Energy markets is going to boom in the foreseeable future (five to 10 years from now).

Ryan, R (2018). Commodity Revival At Risk [slides 4,9]. Retrieved from BCA Research.

A Letter from Your Society President – December

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Joshua M. Howard, CFA

It only took 9 and a half years, but the Fed finally raised rates. As we all know by now, the FOMC raised rates by 25 basis points on December 16th, the first increase since the middle of 2006. Back then I had been in the industry for less than 5 years, had just finished Level II of the CFA exams and was about to buy a new house, which ended up not being the best timing for a real estate purchase. Many of our newer charterholders were still in college then, and most of us work with colleagues who have never experienced an increase in the fed funds rate during their professional careers until now.

With the Fed’s recent action coming at the end of the year, when many of us are already in the mood to reflect on the past, the increase in rates has spawned numerous articles on how the world has changed in the past decade. For example, Instagram and Twitter each have over 300 million active users now, up from 0 at the start of 2006. They, along with other social media services, have not only changed how we connect with our friends, but also how we share information, organize protests and plan events (both good and evil).

In 2015 it is no longer just the manufacturing sector that fears being undercut by cheaper alternatives and automation – Uber, Airbnb, and many other startups are threatening to upend sectors ranging from transportation to lodging to house cleaning, industries that in 2006 seemed very secure. Even financial services is susceptible, as robo-advisors, passive ETFs and fundamental indexing strategies continue to erode pricing power and put more pressure on active managers to actually produce alpha.

Some things haven’t changed as much as expected. The alphabet soup of financial products – CDOs, ABS, CDS, subprime RMBS – that helped cause many bank failures and the loss of billions of dollars during the financial crisis, were left for dead by 2009. In the last few years, however, amid very low interest rates and a thirst for yield, they have come back to life somehow, like a soap opera star from daytime TV. Actually, the last ten years have killed off more soap operas on network television than financial products.

The next year will bring more change. The Fed may raise rates again, possibly multiple times. Political campaigns in the U.S. will continue, culminating in an election in November. New companies will be started, old ones will fail, mergers will occur. The stock market may correct, or it may soar to new highs (and possibly both). It is an exciting time to be working in finance, and a challenging one.

I thank each and every one of you for the work you do each day for your clients, and for adhering to the highest ethical standards despite the turmoil that sometimes surrounds us. I am constantly impressed and inspired by the work being done by charterholders in the region, and I appreciate your commitment to our Society and the industry.

As 2015 comes to a close, I want to wish all Society members and their families a very happy new year.

Joshua M. Howard, CFA
President of the Board of Directors
CFA Society of Minnesota

Battle of the Fed Clichés

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John Boylan, CFA

If you grew up in the 1970s or 80s, you probably watched “Battle of the Network Stars”. For those of you too young to remember Howard Cosell and Telly Savalas, “Battle of the Network Stars” was a very successful limited run TV show that featured celebrities competing in athletic events. Nowadays it seems as though we are going through the “Battle of the Network Market Commentators Clichés” about the Fed’s potential next move.

It doesn’t matter if its TV or the financial press you can’t escape various Fed prognostications such as: The Fed will raise rates soon because unemployment data is reaching its threshold and might surpass it soon—remember what happened when the Fed tightened too early in 1937, or the Fed won’t raise rates because it is worried about the dollar and what is happening in Europe or China, and so on and so on. It gets to the point where I have heard the same arguments pro or con so many times, they do become clichés.

But still, interest rate moves deserve consideration. When it comes to the Fed and interest rate changes, I have two basic questions for myself at this particular moment in time:

1. Q) Do I think that the Fed will raise rates during my investment horizon (i.e. next 18 months)?

    A) Yes.

2. Q) Do I care?

    A) No.

Why? Rates can only do one of two things at this point in time, stay the same or go up. Eventually they will go up. A healthy percentage of market participants like me believe that. However, that forecast is already in my investment thesis and forecasts for the market. What is vastly more important to me is if interest rates are going to go up materially faster than I predict and will it happen during my investment horizon. There is nothing in the data that leads me to believe that it will. For example inflation is relatively tame, wages are stagnant at best, money velocity is nothing to write home about, and retail demand is just OK. Unless I was convinced that any of those things in combination above were to evolve into something more malignant during my investment horizon, there is no reason to drastically modify my investment thesis for the market.

What I try do to do in these scenarios is try to develop a list of potential market-moving events, like some of the things mentioned above like wage inflation, and monitor them for moves that go beyond my expectations. If enough of those things on my list change where my investment thesis is in danger of breaking regarding the Fed and interest rates, then I act. Until then, I don’t.

Therefore my suggestion is ignore the clichés about rates in the short term and pay more attention to matters that can cause events to materially change your investment thesis.

Oh yeah, one more thing. “Don’t fight the Fed”.