OpenMarkets Weekly: The IOU Market

At a Glance

  • Interest rates, oil and uncertainty are driving the current market

Every now and then we see a market condition run by price adjustments in various asset classes simultaneously. This is precisely what happened in the last couple weeks in March.  The events changed the environment into an IOU market: Interest rates, Oil and Uncertainty.

Fed Moves to Zero Rates

Interest rates had been acting in a counter intuitive manner ever since the Federal Reserve moved rates to near zero during the virus crisis.  The entire yield curve became the beneficiary of asset allocations which drove capital out of equities and into fixed income.

The Federal Reserve is now faced with an unemployment calamity in an economy which has seized. The next moves by the Fed will be debated for years as they implement the zero-interest rate policy again and create much needed liquidity for the markets.

Oversupply in Oil

When we’re taught the basics of supply and demand in determining value, we learn that fundamentals are more important than technical analysis.  Crude oil is purely a victim of over supply which in itself has serious consequences for the short term.

With the velocity of the move down, many oil producing nations did not have time to prepare a financial cushion for a prolonged depression of prices.  With technology allowing for cheaper production, the Saudis and Russians pumping full throttle and a US dollar that is strong, crude could be oversupplied and in trouble for a while.

Uncertainty Generates Price Dislocations

It’s said uncertainly is poison for investors.  Lately there have been plenty of things to make investors uncertain.  China, the U.S. elections and of course, the virus have all contributed to confusion in the markets. The lack of clarity forced liquidations and helped in generating price dislocations throughout the globe.

The Federal Reserve actions, the effects of lower crude and a global economy that suddenly stopped, created strong headwinds for the market.

The re-pricing that was witnessed in March was absolutely needed in order to keep the market healthy.

Price Adjustments Are Part of the Market

Every market must be repriced from time to time in order to maintain the “animal spirits.” In many ways it really is an IOU. The market will owe participants the next leg up after the clouds of uncertainty part. It’s important to remember, price adjustments are part of the market, and they can continue until we move to a state of greater certainty.

H. Jack Bouroudjian is chairman of Bull & Bear Partners, a financial services holding company based in Chicago. He is the host of the syndicated program “The Jack B. Show”, a regular commentator on CNBC, author of “Secrets of the Trading Pros” (Wiley, 2007) and a columnist for Townhall Finance.

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