Market Commentary | Low US Rates S08E06

People who are into television series will tell you how they feel when they are waiting for the next episode. Most of us have been there in our lifetime – the nail-biting, the playing out of different scenes, the uncertainty. Will Ross really marry Emily? Did Jesse really shoot Gale? Do we really have to go back, Jack? Is Jon Snow really dead?

That’s almost what’s happening with upcoming US Federal Reserve meeting this Wednesday. This year kicked off with expectations of a further 25 basis points hike early in the year, but a broad market selloff, soft economic data and fears of a global slowdown put that on the back burner. The time to consider that hike may come sooner than expected according to some.

Consensus for this Fed meeting is for no action on rates, a status quo if you will. That prospect has helped global markets rebound, particularly in Asia and Europe. The Nikkei bounced back from a three-week low, led by rises in suppliers in Apple’s supply chain. In Europe, strong gains were registered in energy companies and financials, although Deutsche Bank notably underperformed and fell a further 2.4% following heavy losses on Friday.

Early trading saw stocks rise, the US dollar falling and US yields retreating, as investors largely discounted any move on rates by the Fed, only to reverse by the end of the session. Crude oil also had a yo-yo session, rising on hopes of a production freeze and a weaker dollar, only to fall back by the end of the day. This behavior underlines the market’s edginess – for although no action is expected by the Federal Reserve, a few houses are still calling for a rate hike. Some economists said a rate hike ‘cannot be ruled out’, some have priced it at 40%, and Barclays and BNP Paribas are forecasting a hike.

Those calling for a hike have also quoted what is commonly referred to as a ‘confidence gap’ – is the Fed leading the markets on policy or is it the other way round? Some say that the current period of relative calm - market volatility is low, wage gains and inflation seem to be on the up, and no major international risk seems to stand out – offers the Fed a chance to show it is in the driver’s seat, delivering a change in rates when it, not the markets, deem appropriate. To be clear, market pricing has put the chance of a rate hike this week at one in five, so a rate hike is a long shot at best.

The latest Asian session and the European open have been characterised by some pullbacks, mostly in energy stocks in the case of the latter, as investors brace for the decision. Will the Fed really dare to hike? Will they give any clues about the future path of interest rates? How will the markets react? Make yourself comfortable, show airs this Wednesday at 8:00pm local time.

Disclaimer:

This article was issued by Andrew Martinelli, Trader at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are 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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.