If you thought the volatility in the first month of 2015 has been wild so far, that was just the warm up act. This week promises to bring even more potentially disruptive news and more shocks are ahead. How it’s all going to shake out, no one can say for sure but, as the old Chinese saying suggests, we live in interesting times.
Last week the Swiss showed us just how easily currency markets can be shocked when their central bank lifted its peg on the euro. At the end of last week the European Central Bank announced it was going big on stimulus, launching a massive bond-buying program worth at least $1.3 trillion euro. Euro turmoil is going to wash up on our shores this week and it's not going to be pretty.
The news from across the Atlantic will likely be keenly felt at the Federal Reserve. With the dollar already so strong that it’s threatening U.S. exports and jobs, the Fed will almost certainly be moved to take interest rate hikes off the table for the foreseeable future. The global race to the bottom in currency valuations is threatening to turn into global currency wars and, at least so far, the Fed has remained on the sidelines.
In Greece the voters there are fed up with the fiscal austerity imposed by the European Central Bank and anti-austerity candidates swept recent elections. This is a virtually guarantee of a Greek exit from the European Union as comments from one of the ECB board members did nothing but throw more gasoline on the fire. The ECB will have to capitulate or the Greeks will walk and, right now at least, the ECB is taking a hard line in public statements. While the Greeks are tired of austerity they may not be as tired of being European but don’t count on it. Right now Greek debt stands at 137% of their GDP and they simply don’t generate enough revenue to pay their debts. Greece and the ECB can posture all they want in the press but that doesn't change the math.
For the moment the oil price slide has stabilized but the new stable price is going to be far below the break even price for domestic oil production in the U.S. Almost overnight U.S. domestic oil production has come to a grinding halt. Once the employment envy of the nation, North Dakota is bracing for massive layoffs. The oil shock will be similarly be felt in states dependent on oil and gas revenue which means Texas, Louisiana, and Oklahoma are next up for layoff notices and budget shocks.
Gold is starting off the week lower but that selling is most certainly investors skimming profits from what’s been a blowout month for gold prices. It’s hard to believe that just four short weeks ago gold was trading near $1,180 an ounce. Today selling pressure from profit taking pushed prices back from the brink of $1,300 an ounce. Further upside advances for gold are likely in the days ahead but, like everything else in the market today, prices will be subject to extreme volatility.
If all that wasn’t enough it’s time for earnings announcements on Wall Street this week. The news will likely be a mixed bag with tech companies like Apple announcing record sales numbers while dinosaur IT providers like IBM announce massive layoffs. Energy sector earnings will continue to be a drag on the economy and remain a source for additional layoffs.
For the moment the U.S. remains the bright spot in the global economy but it’s not likely we can keep that up in the face of slower growth in the rest of the world. There aren't many guarantees in the market but it’s a good guess that the next couple months are going to be a wild ride.