Thus a December rate rise in the U.S. feels more like a Clayton’s rate rise – and one that won’t result in a sufficiently attractive rise in bond yields that it will divert too much money from the sharemarkets.
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In recent weeks, a number of Fed speakers have said that a rate hike in December was on the table.
Global markets have rallied as investors welcomed signs the Federal Reserve is confident about the strength of the U.S. economic recovery, with minutes of its October meeting laying the ground for an interest rate rise next month. So there are plenty of excuses to hold off in December if the Fed feels it wants to.
Spot gold (XAU=) rose 1.1 percent, rebounding from near six-year lows. It is the journey, not the destination that matters. “We expect they will hike in December but then proceed slowly after that and that has soothed markets”.
“Currency has been a significant driver for us over the past two years, but we are tilting risk to equities again now rather than currencies”. If interest rates rise, many of those debts could become unsustainable.
A Fed rate will increase concerns in emerging markets which are already anxious over the effects of a surging dollar and capital outflows.
“There is a real currency war going on, QE puts downward pressure on currency”. Sterling and dollar have increased while yen and euro are weak, which will continue.
Joshua Mahony, IG market analyst, said the minutes provided a hawkish view, but markets trended counter to policy implications as global stocks rose, while the dollar fell.
The stocks rally halted on Wall Street at the opening of trading on Thursday, with the Dow slipping almost 0.2 percent as a profit warning from UnitedHealth Group (Swiss: UNH.SW – news) sent the blue-chip index lower.
“The economy is performing more than well enough to cope with a small rate increase from the current record low levels and it’s good to see that the market is moving on from the hysteria surrounding it. The path of rate hikes is far more important than the first”, Erlam added.
“The Federal Open Market Committee Minutes were billed as the biggest news event of the week”, said Societe Generale strategist Kit Juckes. We’re at the stage where markets will feel very messed about if there isn’t at least a nod to doing so.
“In the end it’s a link between the dollar and commodity-linked currencies”.
The positive USA (and therefore Australian) sharemarket response is clear evidence that the anticipation of a United States rate rise is worse than the reality. Staff outlined how the Fed had potentially fallen behind in communicating its intentions, with markets pushing expectations of an initial rate hike into next year. Initially, we think the USA dollar will be strong across the board.
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New Zealand’s two-year swap rate increased one basis point to 2.73 per cent at 5pm in Wellington, and 10-year swaps rose three basis points to 3.61 per cent. Having closed that week around 1.10, we felt the 1.05 area would be tested and ultimately we would see a move to parity. Adding to the equation are the fundamentals of the banks, tying in with the gains from a potential rate hike and justifying the bullish spectrum on the stocks. He stated that a 100 bps upward shift in the interest rate would bring about “2 to 2.1 of revenue which we would hope we believe largely translate into EBIT and so they are tailwinds that can come out of a few of those shifts”. As the FT reports, “interest rate futures imply that there is a 68% change that the Fed will vote to tighten” in December.
