China Concerns Push Back Rate Hike

The cloud looming over the markets regarding the Federal Reserve's decision to raise the interest rate is set to endure, at least for now, as the global economic slowdown remains a major concern for decision-makers. Fed Vice Chairman Stanley Fischer highlighted China's economic slowdown – and the resulting ripple effect – as the primary hurdle pushing back the Fed's decision to raise rates. As a result, the markets remain in a precarious position as analysts attempt to decipher just how long this delay will hold out.

The Fed committee is currently split, with a 'hawkish', aggressive side led by Fischer that's generally more in favor of raising rates and a 'dove' side, led by Fed Chair Janet Yellen, continuing to play devil's advocate on the hike. Still, officials insist that the first interest rate increase in nearly a decade will likely come before the end of 2015.

"What happens abroad does matter for what happens to the United States," Fischer told CNN.

Since the September meeting, the U.S. economy hasn't performed well and inflation has remained low with the weak performance of the global economy. These results are in-line with the Fed officials' concerns about the global economic slowdown, particularly in emerging markets. Peru, for example, relies on commodities for much of its growth, and the current downturn in commodity prices – triggered in part by China's economic slowdown – is seriously hampering growth.

These low commodity prices, particularly for oil, hold U.S. inflation down. This is also a concern for the Fed, as it wants to see inflation rates near two percent before moving forward with a rate hike. At the moment, the rate is close to zero.

New inflation figures are due next week, but analysts expect to see more of the same. This performance will likely play a key role in the Fed's decision. The Fed's next meeting is scheduled to begin on October 27.

Gold Set to Extend Gains to Third Consecutive Session

Gold futures recorded moderate gains on Tuesday as continued delays to the Federal Reserve interest-rate increase, as well as looming concerns over the outlook of the U.S. stock market in the midst of earnings season, positioned prices for a third-session gain in a row.

"Gold is continuing to benefit from the weakness in U.S. dollar and safe-haven buying due to growing uncertainty about the direction of the stock markets," Fawad Razaqzada, analyst at Forex.com, told MarketWatch.

With the U.S. earnings season set to kick into a higher gear, banks will begin reporting their quarterly results. The fear among investors is that these companies may fall short of already-low expectations, and preexisting concerns over the health of the Chinese economy are also undermining risk appetite.

Gold has caught the eye of momentum speculative buyers after it broke above a key resistance level and downward-sloping trend line around $1,140 last week. As a result, gold futures have picked up more than $50 over the past two weeks as investors gain confidence in the view that the Federal Reserve won't raise benchmark interest rates anytime soon.

Low interest rates make gold, which doesn't bear interest, a more appealing option. The recent weak performance of the U.S. dollar is likely having a similar effect.

"Gold tends to gain when central bankers lose credibility, and Fed members are now pretty much arguing in public over 'lift off' before year's end," Adrian Ash, head of research at BullionVault, told MarketWatch.

Student Debt isn't a Threat to U.S. Financial System, according to Bernanke

Ben Bernanke steered the United States through its worst financial crisis in modern times as the Federal Reserve chairman, and now he is weighing-in on student loans. While U.S. student loans are a risk, he insists that they do not pose the same threat to the financial system as housing loans did.

"It is not going to destabilize the financial system," he said, regarding the roughly $1.2 trillion student loan debt, at a Greater Boston Chamber of Commerce breakfast.

While many of the mortgages that sparked the 2008 financial crisis were held by publicly-traded financial institutions, student loans are mostly backed by the government. As a result, they aren't as susceptible to market panic.

Bernanke is the latest among a long line of investors, political candidates and former policymakers to consider the possible effects that increasing student loan debt could have moving forward. Some investors remain concerned that this debt may develop into the next bubble that threatens financial stability.

In many ways, this concern is justified. Many college graduates find themselves saddled with debt that can sometimes run into the hundreds of thousands of dollars, but their employment prospects are limited to low-paying jobs. As a result, repayment of this debt is difficult or impossible in many cases.

"Ninety-seven percent of loans are made by the government, not banks. So it is a fiscal issue and an issue for student who have debt because it affects their ability to buy houses and cars," Bernanke continued.

While Bernanke, who ended his eight years as Fed chairman in 2014, said it was a good things that student loans allow individuals to finance an education that would have been out of reach in the past, he also acknowledged that some loans should not be made. Instead, he stated that better lending and counseling for students should be implemented.

OPEC Keeps Pumping Despite Slow Oil Demand Growth

Global oil demand growth is expected to slow in 2016 from a five-year high in 2015, according to the International Energy Agency's (IEA) latest report, but that isn't slowing down the Organization of Petroleum Exporting Countries (OPEC), which keeps pumping at record rates.

"World oil supply held steady near 96.6 mb/d in September, as lower non-OPEC production was offset by a slight increase in OPEC crude. Non-OPEC accounted for just under 40 percent of the 1.8 mb/d annual increase in total oil output," the IEA said.

The effect will likely be a drastic decrease to long-term non-OPEC production. IEA forecasts that lower oil prices and steep spending curbs will likely cut non-OPEC output by nearly 500,000 barrels a day in 2016.

Oil prices have been in a period of steady decline for more than a year now, with benchmark Brent crude falling from $114 a barrel in June 2014 to around $50 a barrel this week. However, producers waiting for oil prices to recover could be in for disappointment.

The world is using more oil, but high-cost supply, primarily in non-OPEC countries, is being forced out by current market conditions. Still, a projected market slowdown in demand growth next year, combined with the anticipated arrival of additional Iranian barrels, will likely keep the market oversupplied through 2016.

OPEC is expected to meet in December, but no production cuts are anticipated. Instead, OPEC's decision is widely seen as a measure to defend its market share in the face of increased competition from shale oil producers in the U.S. Because U.S. producers have higher production costs than their OPEC counterparts, slumping prices are effectively putting them out of business.

U.S. drillers cut oil rigs for the sixth straight week last week, removing nine oil rigs during the week ended October 9. In total, more than 1,600 U.S. rigs have been removed from service since October of last year. Even with this drop, consistent production from OPEC led the crude oil supply to rise by 90,000 barrels a day in September on the back of record Iraqi output.

U.S. Dollar Experiencing Rough Month

Continued uncertainty surrounding the Federal Reserve's impending hike of key interest rates has triggered a drop in value for the dollar in October. These losses follow what has been a stellar year for the U.S. currency, with the dollar having surged against most currencies for the first three-quarters of 2015.

This month, emerging market currencies have been the benefactors, staging big rallies against the dollar. Indonesia's rupiah has gained 10 percent, the Brazilian real is up just under five percent and the Turkish lira has gained 3.3 percent in the first half of October, according to FactSet. The euro and the British pound have realized similar growth, gaining more than 1.5 percent in October.

In addition to the Fed, there are a number of other factors driving the rally against the dollar. Strong performance of the Chinese stock market, in particular, has played a key role, while U.S. economic data has been disappointing and prices for commodities like oil – the engine of growth in many emerging markets – have recorded increases.

Slightly weaker economic growth in the U.S. makes the dollar weaker, which makes commodities stronger, effectively decreasing the vulnerability of emerging markets. However, this performance will also play a major role in the Fed's decision to raise rates.

For analysts, the question is whether the dollar's weakness is an anomaly, or the start of a longer trend. Most experts agree that the rally is likely a correction that will be short lived, not an outright trend reversal.

In any case, this performance has investors wary about the Fed's rate hike decision. Uncertainty is building on whether it will actually happen this year, and that has investors pulling their cash out of emerging markets at a rapid pace. The global economic slowdown, historically low commodity prices and low inflation are also long-term concerns.

"The Fed's lack of delivery on a rate hike creates uncertainty. It paralyzes investors' decisions and freezes up capital expenditure plans," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, told CNN.

Still, when the Fed does eventually raise rate, it will likely strengthen the U.S. dollar against emerging market currencies. For countries that borrow in U.S. dollars, their debt becomes more expensive, effectively hurting spending and weighing down economic growth.

For now, the U.S. economy continues to do much better than the rest of the world, which will help the dollar maintain an appreciation bias in the coming months.