What has happened since the December 16 rate hike?

As a business owner, there is very little to cheer about when interest-rate hikes kick in. When the Fed announced the 0.25% rate hike on December 16, 2015, the Federal Reserve Bank was confident that the US economy could withstand quantitative tightening and hold the rampaging torrent of global economic weakness at bay. The rate hike went ahead and the USD strengthened for a few weeks. Then the unexpected occurred: the global economy went into freefall with trillions of dollars wiped off equities markets within weeks. This was brought on by the January 4 and 7 stock market crashes in China where the Shanghai Composite index plunged by over 7% on both days. China quickly abandoned its circuit breakers which it deemed to have a negative impact on investor sentiment by exacerbating selloffs. With the circuit breakers gone, very little had changed in investor sentiment at home and abroad with regards to the Chinese economy. China equities are perceived to be overvalued more so than the equities markets of all other emerging market economies and developed market economies. That is precisely the reason why we are witnessing such rampant selloffs as the bubble is quickly deflating on China’s overvalued equities market.

Major averages are down across the board and businesses are being impacted

However, even with the MSCI all countries world index declining by up to 20% from its mid-2015 highs, China remains divorced from the goings-on of the broader economy. The Chinese economy is largely sheltered from global investment and participation, owing to strict government controls on money coming in and money going out. That has not detracted from the negative effect that shoddy performance in China is having on global stock markets. With China’s once insatiable appetite diminished, the exports of emerging market economies like Nigeria, South Africa, Brazil, Turkey, Venezuela, Argentina, Russia and others are reeling. South Africa has been particularly hard-hit by the China meltdown, as the bulk of South Africa’s exports of iron ore, coal, platinum, and other metals go to China. The 180° pivot in China has effectively put paid to the notion of business as usual for emerging market economies. The problem with this is that the multinational corporations operating in these emerging market economies from Australia through to Brazil are largely based in first world countries like the United Kingdom, the Eurozone, Australia and the US. Major corporations such as Anglo American, BHP Billiton, Rio Tinto, Vale SA, Glencore, Shell, British Petroleum and others are suffering immeasurable damage owing to the commodities meltdown.

OPEC and non-OPEC countries scramble to hammer out an agreement

Not even a meeting between OPEC countries including Saudi Arabia, Qatar, Russia and Venezuela could alleviate the tensions in plunging commodity prices. What does this mean for businesses? In short, we are living through treacherous times with extreme volatility in equities spilling over into commodities markets and affecting the bottom lines of companies, their employees and the communities that those people live in. While banks are not necessarily deeply impacted by the weakness in commodity companies, since their exposure is limited to 3% in the US, it is the broader impact of the commodity price meltdown that is worrying banks. Credit lines are drying up; mortgage repayments are coming under pressure, and so are auto loans. The US credit crunch is a real phenomenon that has led to some analysts forecasting a US recession in 2016. Despite all the hype and expectations around the recent meeting in Doha, nothing resulted except a promise to reduce production levels to January levels if WTI crude oil producers agreed to do the same. The price of oil has since plummeted once again, sending equities markets deeper into the red. After the meeting, the price of Brent crude oil plunged 4% as hopes quickly faded of any agreement being reached between OPEC and Russia. The price of Brent crude oil closed at $32.18 per barrel, after briefly touching $35.55 per barrel, while US crude oil dropped to $29.04 per barrel after reaching $31.53 per barrel earlier in the day.

The takeaway for businesses is as follows: Volatility remains high in the global markets. This is evidenced by the VI X (volatility index) which is rapidly rising. This means that companies based in the US, the UK or Europe etc, are generating substantially lower profits in the local currency (USD, GBP, EUR, JPY). Additionally, investors who were hoping to make money on financial stocks in 2016 have been bitterly disappointed owing to the fact that interest rates in the US, the UK and Europe are unlikely to rise any time soon. Accommodative policies are being adopted to try and accelerate the velocity flow of money so as to increase economic activity. Interest-rate hikes would decrease the level of economic activity and bring about a contraction in spending. Credit is tightening in the global economy now and businesses that are reliant on credit will do well to lock in the requisite loans now before conditions worsen with recessionary pressures.