Last week may be a prelude to what’s to come in the coming year, according to Russ Koesterich, BlackRock’s Global Chief Investment Strategist, and his latest Weekly Investment Commentary.
What happened last week? A recap: Global stocks finished with solid gains, but not without what Koesterich calls “wild gyrations” along the way. In the U.S., the Dow Jones Industrial Average climbed 3.03% to close the week at 17,804, the S&P 500 Index rose 3.40% to 2,070, and the Nasdaq Composite Index was up 2.40% to 4,765. Meanwhile, the yield on the 10-year Treasury inched up from 2.10% to 2.17%, as its price correspondingly fell.
“Expect more episodes of volatility as we enter the new year,” writes Koesterich. “An important driver of that volatility will be markets adjusting to less accommodative U.S. monetary conditions. But on top of that, investors will continue to wrestle with several lingering geopolitical issues, particularly with respect to Russia.”
Lower oil prices, which fell another 6% last week and are now down roughly 45% year-to-date, are a big part of Russia’s problems. According to Koesterich, “plunging oil prices are inflicting real harm on several emerging market countries, notably Venezuela and Russia.”
The Russian market and currency, which had stabilized by Friday, looked rockier earlier in the week when the Russian ruble had plunged despite a massive interest rate hike by the Russian central bank.
(See Mohamed El-Erian’s recent blog on Russia: Emerging-Market Crises Show Way for Russia: El-Erian)
According to Koesterich, this rate hike was the largest single increase since 1998, when Russian rates soared past 100% and the government defaulted on its debt.
It’s this history that makes Koesterich nervous.
“Despite a current account surplus and relatively low levels of debt, the combined effect of lower oil prices and economic sanctions leaves the Russian market vulnerable to speculative pressures,” hewrites. “In short, the worry is that an economic contraction morphs into a financial crisis in the country.”