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Kinahan and Laffman: Interest Rates & Oil Key Drivers This Year

February 17, 2016
Investors are concerned about global growth, interest rates and crude oil prices.

Investors have been on a roller coaster ride since the start of 2016, as concerns about global growth, the plunge in crude oil prices and uncertainty about the Federal Reserve has roiled markets. Stocks advanced sharply higher in early trading Wednesday, following the largest two-day rally in the S&P 500 (SPX) since August.

Pointing to the rebound in stock prices, JJ Kinahan, Chief Strategist, TD Ameritrade said: "it's been an amazing rally. It's great that we've recovered so much. But, we are still down 7% on the year. It's been a nice comeback, but let's not get too crazy."

Kinahan joined Craig Laffman, Director, Fixed Income Trading and Syndicate, TD Ameritrade Wednesday morning to discuss recent market volatility and key events ahead. Investors have a lot of questions regarding the potential for negative interest rates, the outlook from the Fed and how to handle the current trading and investment environment. The duo distilled the key points for investors to consider now.  

Big Movers

The two vehicles that have been primary market movers this year are 1) crude oil and 2) interest rates, says Kinahan. Investors who are watching crude oil for clues or trading the commodity need to be aware that crude oil options have different expiration cycles from stock options , he says.

Be aware: crude oil options expire Wednesday, which could trigger odd movements throughout the day, Kinahan warns. "Please be careful if you do trade crude. It could be a little funky today."

Think Globally

No longer can the U.S. stock investor just focus on the domestic economy and corporate profits, currency movement and global interest rates matter too. "Everybody should be extremely focused on what is happening in currency markets –what is happening in the dollar and the yen," says Laffman.

The strength of the U.S. dollar does have an impact on export prices and ultimately the U.S. economy."When you have a strong currency it costs more for nations that import your goods and services. It can actually slow the amount of goods and services that you are selling and ultimately production, which can carry over into slower economic growth. This is not only something the US is facing, but Japan is too," Laffman says.

Going Negative

With the move to negative interest rates in other advanced nations, investors wonder if that can happen in the U.S. too. The Bank of Japan announced a shift to negative interest rates in January, which triggered a brief retreat below zero in the Japanese 10-year government bond.

"If you look at what's occurred in Japan, from an interest rate perspective, they are actually penalizing new depositors at the Bank of Japan if those institutions do not reinvest or lend out those funds. That has carried through to the rest of the world. There is now something to the tune of 35-40% of sovereign debt across the globe is trading at a negative yield," says Laffman.

Global investors are still attracted to the relative high yields on U.S. Treasury debt. As of Wednesday morning, the yield on the 10-year Treasury note stood at 1.82% versus, .65% for its French counterpart and .26% for the German 10-year. "There is still tremendous relative value in the U.S. Treasury market. Investors are smart. If they are going to get 26 basis points on a 10-year German bond or 1.82% on a 10-year US bond they will migrate to the U.S market," Laffman says.

Changing Ideas on the Fed

The current mix of market volatility and global uncertainty creates an enormous challenge for the Federal Reserve, which is slated to release its minutes from the January 26-27 gathering at 2 pm Eastern Wednesday. Back in December, the Federal Reserve broadcast its intentions to hike interest rates as many as four times in 2016.

The first six weeks of 2016 have changed that outlook dramatically. "I don't think the Fed will do anything anytime soon," says Laffman.

If you are confused, it's understandable. "It is an inconsistent message with what has been put out the past few years –that rates will rise. That hasn't played out," Laffman says.

Up Next

Wal-Mart (WMT) is slated to announce its Q4 earnings on Thursday before the market opens. "Walmart remains a very important place to look in terms of what the consumer is thinking," says Kinahan. Investors might brace for fresh volatility. The TD Ameritrade thinkorswim® platform’s Market Maker Move tool, which looks at the short-term options market, is showing an expected move of just over 3% in either direction on the stock.

New Opportunity?

Within the fixed income arena, Laffman suggests focusing on the municipal bond marketplace. However, investors still need to do their homework and understand credit ratings. "Steer clear of bonds with big pension obligations," says Laffman. The good news? "The municipal market doesn’t have same dollar exposure and the sector won't be eroded by a period of strong dollar," he says.

Last thought: Suggested-watching includes the financial sector. Big bank stocks have taken it on the chin in 2016 as investors unwound expectations for higher interest rates, which could potentially help increase bank profitability. "Bank stocks were getting pounded, many down between 11% and 20%. This really affected the market overall. I think the financials have to be a leader for us to do well," concludes Kinahan. 

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