Markets will see subdued reaction from Fed rate hike

Analysts say fear of Fed to come in only if the US central bank hikes rates more than expected

Market experts expect a subdued reaction in global equities, as they face both a rate hike from the US Federal Reserve on Wednesday and renewed concerns of over a trade conflict post the G7 meeting in Canada.

On Friday, the Dow Jones Industrial Average closed 0.30 per cent higher to 25,316.53 after gaining nearly 400 points last week. The S&P 500 index gained 0.31 per cent to 2,779.03 and the Nasdaq Composite rose 0.14 per cent to end at 7,645.51.

“I think there will be a muted reaction from markets as it is pretty much anticipated that Fed will raise rate. Markets will be focused on the after word and on the course of the rate hikes,” Naeem Aslam, chief market analyst, Think Markets told Gulf News.

The Fed slowly started tightening the monetary cycle from December 2015 — its first in a decade — with a small 25 basis point hike, after which they saw five rate hikes. Going ahead, experts expect two more rate hikes this year.

“There is no fear about Fed right now. The equities are back in bull phase. Traders are concerned about geopolitical events,” Aslam said.

The G7 meeting that happened last week renewed concerns on trade escalations between the major economies, even as Donald Trump, the US president, headed to Singapore to meet North Korea’s Kim Jong Un.

Trump is pressuring the North Korean regime to abandon their nuclear programme, which has been a lingering concern for global equity markets.

Analysts said fear of the Fed will come in only if the US central bank were to hike rates more aggressively than expected previously. “The Fed will come and give their prepared speech and they will go back on the stance that any increase will be data dependent. But if the Fed comes out with an aggressive statement that would make the market more nervous,” Aslam said.

The dollar, which is consolidation mode, may gain this week.

“The odds are in favour of a rate hike from the US central bank next week and investors will likely try to position for more gains in the dollar ahead of the meeting,” Konstantinos Anthis, Head of Research at ADS Securities said in a note.