Market commentary: No hike, no change, no rally

On Thursday evening, investors across the world focused their attention on one of the most anticipated Federal Reserve’s press conference ever made, as the US Central Bank announced that it would keep rates on hold. 

Market participants that hoped and bet on the first interest rate hike in over seven years were largely disappointed, with Chairwoman Janet Yellen seconding bond traders’ forecast for lower rates for a longer period.

Although over the past couple of months several voices started to call for the need to normalize interest rates, the FOMC has eventually opted to postpone this major policy change toward the end of the year, if not to the beginning of 2016. The major three concerns behind the Federal Reserve’s decision were, in order of importance: China, low inflation and market volatility.

China, as expected, continues to be a primary concern in the mind of traders and policy makers alike, as the FED expressed its worry that more weakness may be hiding behind the second largest economy’s slowdown and stock market rout.

In fact, as several economists are stating, China may indeed start to negatively affect global growth and inflation, shifting from a growth engine to economic drag, at a time when Europe is still struggling to spur economic and output expansion, and Japan’s aggressive QE programs do not seem to yield the hoped results.

On the other hand, low inflation has always been the main reason for the Federal Reserve not to hike interest rates, as the country’s price growth is still far from the optimum 2% target, even though unemployment in August reached its lowest level since April 2008. In addition, lower oil prices and a strong dollar are not helping the FED in lifting inflation expectations, and therefore policy makers have always stated that an evident uptrend in wage growth would be a key condition for any interest rate increase.

Although the labor market has consistently improved over the past 12 months, wage growth continues to stubbornly lack behind the curve, prompting the FED to subsequently postpone the anticipated interest hike for the large part of this year.

Finally, but not of less important, comes the high volatility that has dominated financial markets over the summer months. Despite volatility per se should not drive monetary policy decisions, Janet Yellen mentioned that the recent and sudden developments within the market environment has contributed to the FED’s decision to keep the base interest at 0.25%, as the Central Bank takes additional time to assess the increased economic outlook uncertainty driven by China and August’s equity selloff.

The market reaction to the FED announcement has, so far, followed expectations, with US stocks closing slightly lower yesterday, although futures are pointing to a positive opening, and European markets trading lower this morning on the back of profit taking after the gains posted earlier this week.

Bond markets, perhaps the asset classes most affected by interest rates changes, benefited from the decision to keep rate close to zero, with yields of European Sovereign Bonds declining across the board, and US Treasuries poised to post sizable gains.

The Federal Reserve decision was of course negative news for the US currency that took a 1.3% dive against the Japanese Yen and lost around 1.2% against the Euro, after declining an additional 0.7% between Tuesday and Wednesday this week.

This article was issued by Paolo Zonno, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.