It was a busy week with developments around the world. For once I am not talking about Greece!
President Obama brokered a deal with Iran that will impact oil supplies, Janet Yellen testified in front of congress, and China’s GDP impressed.
With the recently brokered deal with Iran, US sanctions against their economy will be lifted which will provide extra oil to the global supply. Recent embattled oil prices have come as a result of a glut of supply. Iranian oil, in addition to the current supply, will increase downward pressure on oil prices. That fear has reflected itself in current oil prices preparing for the increased flows.
The reality is their oil production would barely increase. While US imports of Iranian oil would increase their current trade partners in India and China are so large that US imports would be marginal in comparison.
Something to remember is that this is an assumption that the respective governments approve the deal. There are several hurdles that need to overcome before the deal is actually pertinent to oil supply. There is little to no certainty of government approval at this point and results will likely remain unknown for several weeks to come.
A Dove in the Foxes Den
Janet Yellen, Chair of the Federal Reserve Board (FRB), fielded questions from congress. Investors were hanging on her every word. She expertly danced around every question, making it clear, repeatedly, that FRB action will based on economic activity. She did make it extremely clear that she would like to start raising rates in 2015… as long as economic activity permitted.
FRB action should be expected late this year and in fact should be welcomed. When telegraphed like this, equities tend to perform very well over the following 12 months. Please see the footnote attached for an article discussing FRB tightening cycles and their impact on equity performance.
Emerging Market Madness
GDP for the 2nd quarter came in at an annualized 7% for China. The expectation was 6.8%, so from that regard it was a success. The bigger picture is the fact that GDP expectations for 2015 are above 7% so this quarterly rate is a drag against China’s projected growth rate.
The fall in stocks has subsided for now as efforts by China’s government to stymie flows out have been working… as of late.
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