Fed’s oily headache. The US Federal Reserve remains on track to announce the first rate rise in nine and a half years around 6am Thursday, but take care because last Thursday and Friday a couple of events sent a chill through the central bank’s leadership and reminded them that the factors that triggered the GFC are not far away after eight years. Global oil prices fell to seven-year lows on Friday and are heading towards levels not seen for 11 years. Those falls were substantial — US and Brent crude prices fell by more than 11% last week alone. Bloomberg is talking about the possibility of Brent crude falling under 11-year lows around US$34.20 a barrel this week and West Texas US crude heading towards its 11-year low of under US$32.40. Both are possible after last week’s sell-off, which stunned markets.

Crystalising these fears was the shock moves by two US funds — one a junk bond-investing mutual fund aimed at retail investors, which was closed after losing 27% so far this year. It was a US$789 million fund but had run out of cash and could no longer raise money to meet repayments to investors. It was the biggest mutual fund collapse since the GFC in late 2008. The second, a smaller junk bond investing fund of around US$400 million, was aimed at professional investors, and its managers suspended redemptions on Friday night, our time, after it was swamped by demands from investors for their money to be repaid. It said it couldn’t meet those demands without incurring more losses. — Glenn Dyer

A US$2.5 trillion headache. The question for the Fed now is whether the two problem funds are one-offs or whether there are deeper problems that might be made worse by a rate rise. The continuing slide in oil and gas prices and the pressures those falls are creating for the US oil and gas sector in particular are now coming into focus. There is an estimated US$2.5 trillion in oil and gas debts of all kinds alone, according to the Bank of International Settlements, up from $US1 trillion in 2006.

Much of this debt is junk or heading that way and has been issued by the thousands in the American shale oil and gas revolution. Cautious investors have recognised the problem and have made US$5.7 billion in net withdrawals from US junk bond mutual funds this year (which means over US$5 billion in bonds have already been sold into weakening markets, adding to the upward pressure on rates). The Fed’s open markets committee will be watching the oil futures markets closely on Tuesday and Wednesday nights, our time, as they discuss whether to lift rates. If they don’t lift rates, it could very well trigger a quick rise in markets, and then a fall as investors realise the reluctance to increase rates is based on concerns about stability, and not the wider economy. — Glenn Dyer

Peter Fray

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