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Fed’s Decision Could Help Avoid The Worst Case Scenario For Oil

Newcomers to financial markets could be forgiven for not knowing this, as we haven’t seen a rate hike in the U.S. for nine years, but when the Fed raises rates the responses in financial markets usually follow a predictable pattern. Stocks drop as higher interest rates are predicted to slow investment and economic growth, the currency appreciates as it becomes relatively more attractive, and, as a result of that, commodities, including oil, go down in price.

This week’s news followed that pattern initially in two markets as the dollar surged and oil dropped back to close to the previous lows, but stocks rose immediately following the announcement. That had the look of a self-congratulatory move on behalf of traders…they had all predicted a 25 basis point (that’s a quarter of one percent for those that aren’t fluent in bond speak) increase and an accompanying statement with a distinctly dovish tone and that is what they got.

Once that initial thrill of being correct wore off, however, stock traders have returned to a focus on the problems. Global growth is still somewhat anemic, U.S. stocks look fully valued and there are signs of trouble brewing in the high yield credit markets. All of those initial gains had gone in 24 hours. Given that, it seems counterintuitive to believe that oil will behave in a similar way and reverse course. The reaction in WTI was, after all, the logical one. If we look a little deeper at the possible consequences…

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