Much Ado About Nothing
We were kept on the edge of our seats with anticipation over the expected interest rate hike by the Fed in August only to learn there would be no hike. Now, all bets are on the mid-December meeting for the rate increase
So much nervousness and anticipation before the Fed’s September meeting and it was all for nothing. The committee decided to leave the interest rate unchanged, basically because the global economic situation is too fragile and weak, especially in China. Evidently, they didn’t want to increase the risk of it all having a negative impact on inflation in the US, which is much too low.
Of course, the most common interpretation of the Fed’s decision was that things in the world are worse than previously believed. At the same time, Fed chief Yellen assured everyone on two occasions that the Fed funds rate will be increased before the year is out.
Confusing, isn’t it? Three months hardly seems enough time for Europe, China, and other economies to recover. Yet, the Fed seems ready to hike rates at its meeting at the end of October or the last one for the year in mid-December. Most analysts and traders are betting on December.
The thing is; we are back where we were several weeks ago. The overwhelming concerns for the markets are still the Fed and China, and uncertainty hasn’t diminished one bit. Sentiment is mostly pessimistic and, of course, high volatility in all markets remains the norm.
As we see it, with the Fed merely postponing the rate hike, market trends should not change. The dollar should remain the strongest currency. The euro and the yen might not weaken much in the short term, but the trend will probably accelerate the closer we get to December. With emerging economies being the focus of so much concern, their currencies can hardly be expected to strengthen.
Bond rates fell right after the Fed’s decision, but it is only a matter of time before they start rising again, anticipating the rate hike, especially for short-term notes and bills.
Commodities, mainly oil, may stage a bounce now and then, but the overall downtrend will probably hold. It all depends on China’s health – the major commodity consumer in the world – which has shown no signs of improving.
And stock markets will probably stay on a downtrend too. Rallies will surely take place, and might even be frequent, but until the global economic outlook begins to improve, it will be difficult for prices to reach new highs.
We are back to Fed and China watching and keeping tabs on economic indicators out of the U.S., Europe, Japan and China.
The overwhelming concerns for the markets are still the Fed and China, and uncertaintyhasn’tdiminished one bit. Sentiment is mostly pessimistic and, of course, high volatility in all markets remains the norm.
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