Markets Remain on Edge Ahead of Wednesday’s Fed Decision

Market volatility remains at elevated levels opening the week, off the back of continued weakness from oil and credit markets and the backdrop of anticipated Fed action this week.  WTI crude briefly fell below $35/barrel for the first time since 2009 after Iran’s deputy oil minister said there was “absolutely no chance” the country would delay oil shipments, adding to concern over a global supply glut.  Iran expects international sanctions stemming from its nuclear program to be lifted the first week in January, and they already have customers lined up for delivery when they begin selling their crude supply.

High yield credit markets have been under intense pressure recently, underscored late last week when a handful of funds suspended redemptions and/or announced they were closing up shop.  Prominent investors including Jeffrey Gundlach, Carl Icahn, Bill Gross, and Wilbur Ross have all predicted further disruptions in the sector ahead.  According to Wilbur Ross, regulatory changes are forcing trading desks to deploy less capital, which is creating significant liquidity and volatility issues for the markets in general.

There are no significant US economic reports being released today, but the calendar picks back up tomorrow, headlined by the latest reading of the Consumer Price Index.  The Federal Reserve kicks off its two-day policy meeting tomorrow, which is expected to culminate Wednesday with the first rate hike since 2006.  Treasury yields are currently trading 6-9 bps higher across the curve reversing much of the substantial 10-12 basis point drop in yields witnessed Friday.