After Federal Reserve Interest Rate hike, Global Economic Fault Lines Deepen
By Nick Beams
Global Research
December 20, 2015
After an initial rise following the decision by the US Federal Reserve to lift interest rates by 0.25 percentage points on Wednesday, stock markets around the world have experienced significant declines over the past two days.
The biggest falls were in the United States, where the Dow was down by 368 points at the close of trade on Friday, a drop of more than 2 percent, while the more broadly based S&P 500 fell by 1.8 percent. The CBOE VIX index, which measures market volatility and is often referred to as the “fear gauge,” went over 20, a level regarded as indicating a high degree of market stress.
Markets also fell around the world after rising in the immediate aftermath of the Fed decision. The Euro Stoxx index dropped by 1.4 percent on Friday after rising earlier in the week. In Japan, the Nikkei index closed 1.9 percent lower.
Underlying the volatility on share markets are a series of widening fault lines in the global economy produced by the deepening trend toward stagnation and slump. The increased turbulence in financial markets is an expression of the fact that massive financial speculation, fuelled by the Fed and other central banks’ pumping of trillions of dollars into the banking system since the 2008 Wall Street crash, is being overwhelmed by developments in the real economy, particularly the decline in industrial production.
So far, this interaction has found its sharpest expression in the market for high-yield, or “junk,” corporate bonds, particularly in the energy sector, because of the sharp fall in oil and other energy prices, coupled with the decline in basic industrial commodity prices to their lowest levels since the global financial crisis.
This week, the price of Brent crude oil hit a seven-year low of $36.33 per barrel, further heightening problems in the energy junk bond market, where money poured in to finance risky ventures when the price of oil was trading at around $100 per barrel less than two years ago.
But the turbulence is not confined to energy-related finance. According Lipper, a Thomson Reuters company that supplies information to financial markets, investors withdrew $5.1 billion from US mutual funds that purchase bonds rated as investment grade by credit-rating agencies—the largest such withdrawal since 1992. This was accompanied by a further withdrawal of $3 billion from junk bond funds. In the week to December 16, it is estimated that $15.4 billion was withdrawn from taxable bond funds.
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