Markets In-Review: Markets Fall on Policy Concerns

• Boston Fed’s Rosengren says it’s appropriate to tighten policy, leading to market selloff
• VIX index spars to highest since Brexit
• Selloff sees S&P 500 down 2.5% on Friday, to 2-Mo low
• ECB not discussing QE extension raises concerns for program’s future

Speaking on Friday, Federal Reserve Boston President Eric Ronsegren sparked a selloff across bond markets. Ronsegren being considered a ‘Dove’ made giving an OK to a gradual increase of interest rates convey a message that many other members at the Fed are also comfortable with tightening policy. “If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” he said. Failure to continue on the path of tightening, alternatively, was seen creating risks of a shorter, rather than lengthier recovery.

Yield of the policy sensitive U.S. 2 year government bond, which moves inversely to its price, progressed rapidly on Ronsegren’s commentary, testing 0.8% levels during the day, though it eventually settled at 0.78%. Selling pressure was very strong with equity. The S&P 500 lost no less than 2.5% on Friday, Hitting a bottom 2127.81 points meant the lowest for the U.S. index since July 8th. The Dow, similarly, fell over 394 points on Friday, to 18,085.45. Losing 2.2% Tue-Fri, meant the worst week for the U.S. industrial index since the selloff at the start of the year. After hitting a monthly low, the VIX index surged as equity tumbled, rising to as much as 17.5 points, its highest since June’s Brexit awes have led it to over 26 points.

Draghi casts doubt on ECB’s future QE

To some extent, Friday’s turmoil didn’t come without warning. Investor concerns, namely, were set in the European Central Bank’s rate announcement, Wednesday, where president Draghi failed to meet investors’ expectations for more accommodation by the ECB, or even guidance of such. When asked on the matter Draghi even went on to state that an extension of the bank’s Quantitative Easing program wasn’t even discussed.

It should be noted, however, that in spite of failing to meet expectations, impact of the hawkish Draghi wasn’t immediately noticeable, with the DAX actually increasing slightly on Wednesday. Friday’s losses, however, have led the German index down to a 1% weekly loss. The CAC 40, similarly, lost 1.1% for the week. Greece, meanwhile, has been bleeding more heavily, with a 2.6% weekly loss at the Athens Stock Exchange’s General Index.

Being a concern from a rate hike, rather than a flight-to-safety, also meant bad news for gold prices, which lost 0.8% on Friday, summing to a 1.6% Wed-Fri decline for the metal, to USD 1,327.83 per oz.

Oil prices, meanwhile, continue to run somewhat dis-attached from other assets. Gains were recorded on Wednesday with the American Petroleum Institute reporting a fairly massive 12 million barrel fall of crude inventories. They’ve extended on Thursday, as the U.S. DOE reported an even larger 14.5 M barrel draw. After peaking to USD 47.75 per barrel, however, oil prices began tumbling amid reports that Iran, Libya and Nigeria are demanding to increase production, thus foiling Saudi attempts to obtain a freeze on production. Coupled with Friday’s selloff, oil ended the week at a lackluster USD 45.71 per barrel.