The Week in Review: Falling Rouble, Dovish Fed

by


U.S. stocks rallied and investor confidence returned late this week after a rise in volatility from falling oil prices and geopolitical risks stemming from Russia’s economic collapse.

Several economic indicators showed an improving economic environment in the U.S., even as oil continued to fall and foreign investors exited emerging markets. Most attention focused on Russia, where economic sanctions from the European Union and falling revenues from cheaper oil pressures the energy-dependent economy. 

Uncertainty from the fall in global demand caused volatility in the U.S. to rise until the Federal Reserve indicated a more accommodative monetary policy, which bolstered stocks later in the week.

“Patient” Wording from Fed

The FOMC said in a statement that it would be “patient” in normalizing monetary policy, which indicated to investors that it would not rush to raise interest rates in 2015. While the timing of the next rate hike remains unclear, investors are growing increasingly confident that a rate rise will not happen next year, as cheap oil has kept price growth low and the need to stave inflation with higher interest rates appears to diminish.

This week, the Cleveland Federal Reserve noted that CPI-U fell 0.3% in November, the first sign of deflation in the United States. In Europe, weak CPI growth has indicated to some analysts the risk of a liquidity trap in Europe is growing, while Bundesbank President Jens Weidmann dismissed the need for a more accommodative monetary policy. In the U.S., the Fed’s dovish position remained intact even with unemployment below 6% now and expected to fall further in 2015.

Russia Volatility, Canceled Rouble Exchange

In Russia, volatile equities, a falling rouble, and uncertainty about the future of oil has caused widespread panic, with some bankers warning that the economy is in the throes of collapse. Reports from the country of Russians rushing to buy expensive items to shed roubles before they lose further value demonstrate the growing fears of economic instability in the country.

Beyond Russia’s borders, the rouble has fared no better. Earlier this week, Forex Finland announced it would no longer exchanges roubles for euros, citing growing instability in the currency. Some retail brokerages have also halted trading of the Russian currency.

Russian markets were also shocked after the Russian government unexpectedly announced an interest rate hike to 17% in an attempt to control the rouble’s fall in value. 

U.S. Economic Indicators Improve

While less severe, U.S. stocks also saw greater volatility this week, only to recover on Thursday after the FOMC’s clear indication that low interest rates would remain for the near future. Janet Yellen said in a public speech that she saw several tailwinds that were bolstering American growth, including lower energy costs.

Several economic indicators released this week bolstered Yellen’s argument. The Thomson Reuters and University of Michigan preliminary December Consumer Sentiment index rose to 93.8, which economists largely attributed to the falling energy costs increasing consumer discretionary purchasing power.