Newsletter dated March 23, 2017

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Currently the financial markets rally has come to a halt so far. Market volatility is still low. There have been view events. The U.S. Fed has raised interest rates by a quarter percentage point.

„U.S. economy is doing well.” According to Federal Reserve chairwoman, Janet Yellen, the economy will keep growing just enough to put more Americans back to work, but without overheating to generate excessive inflation. American workers will see gradual pay raises that keep compensation rising faster than inflation. Interest rates will rise gradually, while staying low by historical standards.

The message is: It will remain the slowest cycle of interest rate increases in modern history. Ms. Yellen evinced little fear that the Fed is behind the curve. She suggested no urgency toward a tightening of the money supply, suggesting that two more interest rate increases are on the way over the remainder of 2017. The central bank’s policy committee said it aims for „symmetric” 2 percent inflation and would be equally displeased by inflation that was too high or too low. That implies that the Fed is not inclined to overreact to the possibility that inflation could drift slightly above 2 percent in the coming months. After the announcement, the interest rates on Treasury bonds actually fell. That implies that markets were ready for signals of even more aggressive rate rises.

Oil dropped further below $50 after concerns that OPEC’s output cuts aren’t tempering a surplus in the U.S. triggered the biggest slump in more than a year. Currently the price for a barrel WTI crude oil is 10% below its level at the beginning of the year. The shale oil industry in the U.S. has made great strides to cut costs. The number of U.S. oil rigs in operation has been increasing from 371 to 631 within the last 12 months. The futures contract curve has turned from „contango” (low current and higher future prices) to „backwardation” one month ago it has come back to a nearly flat shape now – see our chart of the day for crude oil futures curve now, 1 month and 12 months ago!

One reasonable economic interpretation is that oversupply in the short term seems to be over. Few weeks ago there has even been a lack. So yes, the OPEC deal on production cut has made a significant change in the overall stock situation. However the U.S. is still ramping up production at increased price levels.

Erwin Lasshofer and his INNOVATIS team expect new equilibrium could be found at current levels near $50 per barrel. We still find opportunities in the energy sector although having lowered our overall exposure.