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The interest rates set by the Federal Reserve Bank have been pegged near zero for many years now, and investors are signalling that they are ready to see it go up.

During the financial crisis, interest rates were slashed down to historic low levels as the Fed did everything in its power to ease lending and help spur the economy back into recovery. Beyond cutting interest rates, the Fed embarked on other programs, such as bond-buying, to try to inject more cash into the economy. However, as markets improved, it has been trying to find a way to start backing out of its “emergency” position.

The bond-buying program of “Quantitative Easing” ended several months ago, but they still have not been able to raise interest rates back to “normal” levels. One major reason is that there has not been enough inflationary pressure to justify it, but another major concern is that the shock of raising interest rates could hurt growth as money becomes more expensive to borrow.

However, the bonds market, the leading indicator as to how the market as a whole will react to changes in interest rates, is holding steady ahead of next week’s meeting, where most analysts expect the rates to finally start to rise. Bond investors are the most sensitive to interest rate changes; as the interest rates on government bonds change, the yields bond investors rely on are impacted directly. Stable bond markets ahead of potential interest rate increases sends a strong signal that the markets are ready for what the Fed throws at them.

If you want to get exposure to bond trading on HowTheMarketWorks, you should check out some Bond ETFs! These include:

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Times have been changing rather quickly for the alliance between the United States and Saudi Arabia.

The main reason is energy. US dependence on Saudi Oil has been dropping rapidly in the last decade, dropping by 50% thanks largely to increased oil production in America (if you want to try trading oil on HowTheMarketWorks, check out the [hq]OIL[/hq] ETF!). Saudi Arabia once was a major force for US policy makers to contend with; it is a leading member in OPEC, the consortium of many oil producers that coordinates production to try to ensure stable prices for its member countries, and from the mid 1970’s until very recently the United States was very depended on imported Saudi oil to keep its engines running. Many Saudi fortunes were also made when gas prices spiked in the mid-2000’s.

However, in the last few years the dynamic has been changing rapidly. The United States just has not been demanding as much oil as it used to, which is coupling with the massive drop in oil prices to have a huge impact on the Saudi budget (another popular oil ETF is [hq]USO[/hq], [trade]USO[/trade]). This comes as the United States has withdrawn troops from Iraq, and so is less reliant on Saudi military bases for supplies and logistics. There has also been tension because the Saudis would very much like the US to become more actively involved in in military campaigns in Syria, and the recent nuclear treaty with Iran, Saudi Arabia’s historical rival.

The Saudi King Salman will be in Washington today to discuss these policies and others with President Obama, but the balance of power at the table will be very different than it may have been just a few years ago.

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The next 5 days will be a very important learning experience for traders trying to sift through the rubble after China’s highly-publicized currency devaluation and subsequent shockwaves through the world markets.

American markets have begun their recovery, with the S&P 500 (ETF: [hq]SPY[/hq]) and Dow-Jones (ETF: [hq]QQQ[/hq]) indecies both recovering some of the losses. However, the next few days will be critical for one big reason: the markets will not be open at the same time, so there should not be any spillover effects.

China is currently engaging in World War Two victory anniversary celebrations, closing the stock exchanges while the events take place. After that, the US markets will be closed for Labor Day, effectively segragating the actual market forces from each market to itself. This means that Chinese instability cannot cause serious intra-day trading jumps in the US, and equity flows in the US will not work for or against Chinese markets.

If you want to invest in Chinese assets on HTMW, check out the [hq]MCHI[/hq] ETF, which is heavily focused on Chinese mid-sized companies!

Stock index futures are up this morning as investors are starting to see buying opportunities after the big losses last month that stemmed from China’s stock crash and currency unrest around the world. However, investors are beginning to think that the initial sell-off was a bit of an overreaction; stock index futures are used to measure how investors feel the market will move in the near future. As investor confidence goes up, so do index futures, so when we see these kinds of increases we know the market is starting to lean towards growth.

Lots of government reports were also released today; 190,000 jobs were created in the US, although that missed the estimate of 210,000. Long-range Treasury bond yeilds moved slightly higher, but shorter-term bonds stayed the same. This usually means that the bond market thinks equities will be more attractive in the near future, but not much money has been moved from bonds into stocks just yet.
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If you want to buy into a stock index, try trading an Index ETF like SPY for the S&P 500, or QQQ for the Dow-Jones Industrial Average! Click Here for more popular Index ETFs that you can trade on HowTheMarketWorks!

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In a move that suprised almost no-one, OPEC announced that cuts in production to help prop up oil prices may soon be on the horizon.

What was surprising was that US oil producers, who are not affiliated with the group, concurrently cut back production estimates. The change in US estimates is mostly technical; instead of relying on state research and computer models, the new accounting estimates based on what actual drillers in a few key states are predicting based on the conditions on the ground.

Both cuts come at a time when oil is near its 6-year low point, oil producing countries around the world have been feeling the bite with constantly-low prices. Many oil producing countries in the Middle East are members of OPEC, an organization that works to maintain stable prices for producers. In North America, Canada and the United States are both major oil producers, with the Canadian economy being especially hard-hit by low prices and the global supply glut. In Europe, Norway is one of the biggest producers, with government officials calling the recent price crash “worse than the financial crisis” for the Norwegian economy.

Russia is the world’s leading energy exporter, and the collapse in prices has been devistating to their economy, just as sanctions from Europe over Crimea and Ukraine began over a year ago.

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Alibaba (BABA) has had a wild ride since its IPO last year. Today, shares are up about 3% from the first day of trading, although that pales in comparison to the heights in November, where they hit about 75% higher than today.

Since November, prices have crashed down; their growth is still strong, but investment firms and hedge funds are having a hard time valuing the Chinese e-commerce giant. One of the major issues is how to value potential revenue growth; one of the most appealing parts to buying into fast-growing companies is also what makes them the most risky. Most of the value of the stock is rooted in how much investors expect the company to grow in subsequent years, which places a lot of value in speculation on what their market will be like 1, 3, or 5 years down the road.

Alibaba is feeling this cut now. Some of its biggest investors, large American hedge funds, are starting to dump their shares and look elsewhere, namely JD.com (ADR), which has the same market niche as Alibaba, but a very different business model, and much faster growth in the last year.

So what gives?  Investors are looking for the highest return, and Alibaba is feeling the cut of changing market sentiment. JD is “Hot”, a small upstart that is gaining market share and attention quickly, while Alibaba, the darling of investors all over the world last year, is suddenly “Old News”, and needs to re-prove its worth to keep investment dollars coming in.

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Yesterday index futures around the world started pushing up after China announced a cut to interest rates and banking reserve requirements. That trend continues today, with stock prices in Europe and North America pushing ahead and erasing losses from the past week. China, however, is looking at a different story.

The Shanghai Composite Index fell a further 1.3% as of Wednesday morning, with almost 5 trillion in equity erased in the last week of trading. Since June, about half the value of all Chinese stocks has disappeared. Most investors agreed that the Chinese markets, both stocks and property, have been caught in an increasingly-unstable bubble, and the massive loss in equity is a reflection of that bubble bursting. This has been made worse by bad economic news; China is looking at the lowest growth rates in decades, leading investors to further question why equity prices were rising so high in the first place.

In the near term, stocks around the world are beginning to recover, but the bad news is yet from over for China.

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Stocks around the world this morning after the Chinese central bank announced interest rate cuts, along with lowered reserve requirements for banks to encourage banks to start lending and put a stop to the global equity selling spree.

This comes a week after the same bank drastically de-valued the Yuan, sending stocks, currencies, and futures around the world spiraling downwards. Yesterday the Dow had the biggest single-day drop in history, although it had somewhat recovered by the time trading halted.

So why cut interest rates? Central banks use interest rates and reserve requirements in their quest to constantly balance economic growth with inflation; having low interest rates makes it very cheap for people and businesses to take out loans, which can become the engine for economic growth.

Reserve requirements are what banks are required to keep in their valults and not lend out; when reserve requirements are lowered, more cash is available for banks to lend, which again can help drive growth.

However, this can come at a cost; if too many loans are taken out at the same time, it injects a lot of cash into the economy all at once, which raises prices and causes inflation. Too much inflation means that all that economic growth is lost to higher prices; instead of more economic activity, it is the same work done with bigger numbers.

These two counter-acting results mean that when the economy is strong, central banks try to raise interest rates as high as possible without hurting growth to prevent too much inflation. When the economy is weak, they lower interest rates as much as possible without causing too much inflation.

The higher the interest can get during the periods of strong growth, the more “room” the central banks have to help drive growth when the economy is weak by lowering the rates. If the interest rates are already near 0 when the economy starts to get weak, there are far fewer tools central bankers have to help get things running again.

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Stocks around the world continued to lose value, over $5 trillion in value has been lost in the last 2 weeks, as investors continue to flee riskier assets after China’s currency devaluation.

The move, which many have claimed was a move designed to boost exports, has caused waves all around the world. Investment to developing countries has been especially hard hit, with Kasakhstan the first country to experience rapid inflation in its wake.

So what happened?

China devalued its currency; meaning it lowered its exchange rate compared to other countries, by over 6% in a span of a few days. From an import-export perspective, 1 US dollar now buys 6% more Chinese goods as previously, while US goods are now 6% more expensive to import to China. At this level, it works to boost Chinese exports and deter imports from other countries.

From an investor’s perspective, things look a bit different. Investors all over the world buy stocks, invest in companies, and do business in China, usually with their investments denominated in the Chinese Yuan. This means an investor from London converted his British Pounds to Yuan, and used that to buy stocks on the Shanghai Stock Exchange. From this investor’s perspective, when he eventually sells his shares, he will convert it back into Pounds.

When the exchange rate suddenly drops, it means that his investment is now worth less by exactly that amount; all of his investments in China would have just lost 6% of their value overnight. For the trillions of Dollars, Pounds, Euros, Yen, and Yuan invested from all over the world, this is a substancial loss.

This means that investors who lost value with the currency devaluation now are acting a lot more conservatively, pulling their money out of “risky” investments, and countries with less stable currencies, to try to find something more stable, like bonds. Currency traders are doing the same; trying to move all their assets out of riskier currencies. This is causing a domino effect; countries that were previously not involved, but which may have strong trading ties with China and so depend on exports to China (like Kazakhstan, which exports raw materials to China) are also getting hit both by investors pulling money out, fewer exports to China, and currency traders betting against them all at once. As more countries start to feel the sting, the panic begins to spiral outwards.

The market is still looking for a bottom, but until prices begin to stabilize, be ready for some volatility in your portfolio!

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