Russia Interest Rate Hike, Falling Oil, Bring U.S. Equity Uncertainty

U.S. stocks saw an unusual day of price swings Tuesday as investors mulled the significance of an interest rate hike in Russia and falling oil prices.

U.S. equities fell, rose, and fell again on Tuesday as traders assessed the significance of a falling Russian ruble, which fell over 6% Tuesday morning. The Russian currency saw so much increased volatility that some retail brokers halted trading of the ruble against the U.S. dollar, as fears of illiquidity mounted. Brokerage FXCM was one of the firms to suspend USD/RUB trading.

U.S. stocks saw an unusual day of price swings Tuesday as investors mulled the significance of an interest rate hike in Russia and falling oil prices.

U.S. equities fell, rose, and fell again on Tuesday as traders assessed the significance of a falling Russian ruble, which fell over 6% Tuesday morning. The Russian currency saw so much increased volatility that some retail brokers halted trading of the ruble against the U.S. dollar, as fears of illiquidity mounted. Brokerage FXCM was one of the firms to suspend USD/RUB trading.

Russian, U.S. Stocks Swing

The Russian stock market saw intense swings, causing the RTS index to fall over 12 percent by the close of trading in Moscow. Russian bank Sberbank also fell 12 percent during trading, or $2.1 billion in market cap. Russian banks were amongst the biggest losers, with many traders anticipating declining returns on capital because of weak ruble demand and falling revenue from energy exports.

The downward momentum temporarily reversed when investors anticipated the Russian government would introduce currency controls, but the government squelched those rumors in a statement Tuesday that exacerbated the Russian equity decline.

If oil remains below $60 per barrel, Russia could see its GDP shrink by as much as 4.7% in 2015, the Russian Central Bank warned in a statement.

U.S. stocks had a less extreme but nonetheless volatile day on Tuesday, as investors mulled the potential illiquidity of growing disinflation and slower global growth. The S&P 500 rose 0.2% by afternoon trading after opening at a loss, but those gains quickly reversed only to return in part later in the day. The VIX, or volatility index for the S&P 500, rose to over 23 in midmorning, and then fell briefly below 20.

The volatility in American stocks runs counter to the norm for 2014, which has seen a broader decline in volatility. The VIX had fallen to below 11 at its lowest point in the year.

Impact of Oil Fall Remains Unclear

Analysts and economists continue to debate the fall in oil prices, with growing disagreement over whether oil prices have reached a bottom. In a recent note from Morgan Stanley, the investment bank noted that falling oil prices could invigorate consumer spending and be a net plus for the U.S. economy. Oil prices do not seem to be falling due to lack of demand, but due to oversupply.

Already in the United States, gasoline has fallen to less than $2 per gallon, roughly half of prices seen earlier in the year. Some economists have revised upwards their expectations for U.S. consumer spending as discretionary income from lower energy costs encourages consumer confidence. Last week, the consumer confidence index rose to its highest point since 2006.

Falling oil prices may also help energy-intensive manufacturing and service industries, as input costs fall. Airlines and utilities have already posted large gains as growing investor confidence in falling prices brings greater bullish speculation to the sectors.

However, some economists warn that falling oil prices could threaten the U.S. economy, which has become a larger producer of energy and thus reliant on revenue from energy sales.