Friday, January 15, 2016 - Article by: Bart Castelli - Homestar Financial Corporation NMLS #70864 -
Mortgage rates surged lower at the quickest pace of the year today as stocks and oil prices continued suffering heavy losses. At present, investors are fleeing from these riskier assets and seeking safer havens in the bond market, including the bonds that back mortgages.
The stock market ended this week a lot better than last week but still lower - volatility through the week should not have surprised. The interest rate markets after all was said did not change much this week - until today. The only key economic reports this week were weaker than expected. Opinions are flying as investors see the drop in equities as a slap in the face.
Wall Street firms that make profits when stocks increase, licking wounds so far this year. This is not Armageddon. What is happening this year is what a lot of economist thought would occur, as I wrote about the coming declines a few times in December. The only surprise was the timing, I did not expect this for another couple of months. The ringer is crude oil and the negative impact it will have on economies. Crude is in free fall and China's economic growth crumbling.
After preceding kindly, cautious, and with some thought - the Fed looks ridiculous. And after a week like this, possibly incompetent and dangerous. The Fed should not react to 10% or even 20% runs up and down in stocks, but this sell-off is global. The Fed has claimed that the US is not subject to significant influence from the outside world, that it must begin to act now to reduce the rate of job creation, and that this energy market stuff and low inflation are temporary.
The bond market no longer cares how much the Fed tightens, betting now that no matter how high it goes it will soon reverse. The Fed will have to shift, and soon, no matter how embarrassing. If it denies
Next week markets are closed on Monday for MLK's birthday. Next week has housing data with existing home sales on Friday, not much prior to that. Next week market volatility in MBSs and stock markets will be excessive. Equity markets momentarily oversold from a technical perspective, expect volatile swings led by crude oil, also very oversold for the near term.
In summary, looking back and not considering the intraday volatility, the bond and mortgage markets did not change much - but we did manage very nice gains. The 10yr note hit a key resistance level today at 2.00%, it held. Crude oil in a free fall this week may be set for a rebound next week and in turn if crude prices increase the stock indexes will improve. Next week will be even more volatile than this week. Regardless of what financial markets do here and globally next week, the bearish sentiment will continue and crude oil will drop more before a bottom. Also this is earnings season, businesses overall likely to report weak Q4 earnings and soft forward guidance. So far 2016 has been great for rates, but locking now will remove any further risk in the future. Proceed with caution as things could change too quickly in markets like this.
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