Several topics to discuss and I don’t know from here to start. I am in fix whether to start from being an economist or being an Economic Journalist. I don’t want to start on with US Fed rate hike rather I have something more important thing to share. After 4 decades , US has finally, partially, approved Export of Crude oil. This will save the US junk bond markets and also the US oil companies. We all know that over the last couple of series of articles I have been covering about the deep problem for the US oil companies as Fracking technology lead to stupendous oversupply of crude for the US markets. The prices are so low that oil producing companies are bleeding and filing for chapter 11 for bankruptcy code. The Republican leaders in the US congress have accepted the same and now the Democrats are awaited to approve and both houses the and senate have to pass and them US President have to sign it into law. US oil producers were extensively lobbying the congress to lift the ban on oil export.
Lifting of the ban would create stupendous inflow of capital as US will fight to close the monopoly of Russia and Middle East price control. Further US economy will start creating jobs as more investments and an oil company comes into play. The biggest things to watch will be the price war across the globe since US have enough stock piles and the world is running short of storage. But price war would lead to more problems as price competiveness would lead to more problems for the producers creating a ripple effect on the US oil industry.
Now coming to the US fed rate hike. Yellen was under pressure from the both political parties as the ruling party of US is more concerned to show the Americans that US economy is all health and hearty. Whereas the other opposition party is more focused to prove that image of the economic growth is false and US is still struggling. Markets might have discounted the factor of rate hike but the biggest question is that is the market trying to hide some bigger problem which is yet to be known by the global economy. Countries like Brazil, Turkey and South Africa would be under intense problem due to the rate hike as they have negligible foreign reserves and more debt on their economy.
Well these will take time to shape up. But the immediate threat I could find in 2016 share buy back scheme is going to go for a big hit in 2016. US corporate have been taking zero interest cost funds and invested the same in buying back their won share which lead Dow Jones to create new highs. U.S. companies spent $516.7 billion buying their own shares in the first nine months of this year. Slow down of the Chinese economy followed with crash in commodity sector will add more fuel to the declining profits of the US companies. As zero interest rate are gone US companies will be cautious in terms of borrowing. In between US Banks are also playing safe since they have hiked the lenders rate of interest whereas they did not hike the depositor’s rate of interest.
In between those who have been thinking that massive outflow of capital will happen once US Fed rate hike happens well be cautious and don’t take rest. FED is clear that if economy is in good shape then rates will go up. Current gas prices and crude prices are so low that consumption of goods and services numbers will be healthy in this winter. Hence coming quarters numbers will be good. Further as economic numbers tends to be good outflow of capital will happen in due course due to fear factor more than the real rate hike. Dollar credit to non banks outside the US came around $9.8 trillion at the end of the 2nd quarter and around $3.3 trillion came to emerging markets according to BIS. Further as US economy in 2016 will gradually prepare for rate hike then the unwinding of capital will happen. As I told earlier US economy is heading for election and hence unwinding of capital is bound to happen and also proving the economy is stable is more required.
US don’t have any more strength to bear high interest cost on its bonds which they are paying to the countries like china. It has no option but to improve its economy even by shadowing numbers. Export of crude will be beneficial for US as well as for countries like India who are importers. If crude prices drops further only problem is for the players and dealers of the commodity and not for those who consume it. 2016 will be roller coaster year.