I walked down to an isolated hallway in my sleep. Twenty feet far, I saw 12 people cloaked red and blue stood in a circle. They were surrounding a coffin which looked very old. Slowly, a woman with her hair as white as snow moved forward and opened the box. From the box, stood a vampire. He looked very angry, well I would be pissed too if I stayed lifeless in a box, The woman brought him 25ml of blood and he was resurrected again. The celebration begun and everyone started dancing. The Beethoven’s symphony and red wine was floating in the air when the east wind blew up the curtains of the hall with sunlight passing through and sending the vampire back to the box.
After numerous, appearances of the Great White Yellen, I don’t know about US but my own interest in this is hiked. On 16th December, 2015, Fed is expected to lift off the cost of borrowing by 25 basis points for the first time in nearly 9 years. But, would it really happen? Janet Yellen could share this as a Life event on her Facebook wall. Her post could read as ” Finally did it, merry Christmas to all of you”. Ben Bernanke, Barack Obama and Mario Draghi liked it. Mark Carney could comment on the post which would read as “Why so soon?”
The hype was created during the last Fed meeting in October, 2015 about rate hike. Later on, however, continuous increase in the Non-Farm Payroll and a decline in the Unemployment rate around 5% put the Dec lift off on the table. The wages grew in the last quarter and the slack in the job market seemed to have finally gone. The Fed Chairperson Janet Yellen was quite confident in the last meeting about inflation reaching its target by 2016. Now last time we checked, the inflation was 0.2% (below the 2% target) courtesy Crude Oil but the core inflation which excludes the swinging energy and food prices was 1.3%.
The Christmas is the time to celebrate and the fed lift off might not be an appropriate way to welcome Santa. It would be interesting for investors to see the impact of the Fed lift off on different asset classes.
Impact on Equities
The Standard and Poor’s 500 Index fell almost 3.8% last week. The US equities have been surprisingly upbeat in the last quarter even after Fed signalled about Doomsday December. The US economy has been in a “not so bad” phase since the stimulus measures. The economic recovery has been weak but better than Europe. There number of jobs created had been decent amidst of China and Europe slowdown. Since 2008 till date, Dow Jones has nearly doubled and the data proves that consumer spending has increased.
The current decline in equities could be the result of continuous falling energy prices (which hit 6 year low on Friday). There was a massive selling of Junk Bonds last week. Now, before you ask; junk bond is a high-risk high yielding security, typically issued by a company looking to raise capital quickly in order to finance a takeover.
The Third Avenue Fund which is the biggest US mutual fund since 2008 stopped withdrawals of its 789 million high yield credit fund last week which shows fear among the investors about the lift off, But this would not stop Fed from rate hike, it could prevent it from doing it on a faster pace.
So, the equities should remain stable if the fed increases rates by 25 basis points. The utility stocks might take a hit but financial stocks will be lucrative to trade. The wall street’s eye would also be on the USD 1.1 trillion dollar government -wide spending bill which is pending to be finalised by the lawmakers in Washington to avoid a shutdown.
Impact on Gold & Silver
A general opinion formed about the precious metals these days would be a decline in the prices once the cost of borrowing increases. The most basic reason behind it could be a strengthening dollar. The US dollar had been highly overvalued and started negatively impacting the manufacturing output. The markets have already priced the rate-hike and thus with a gradual pace , the impact on dollar would not be too much. Also, the surge in dollar has been higher than anticipated because of the monetary easing programs in major economies like China, Japan, UK and Europe.
So, the impact on precious metals can be opposite to what is expected. In the most of the rate hike cycles since 1971, it is observed that during the start of the cycle precious metals most of the time surge. And as we know, that yellow metal has slipped down quite a lot in past few months on account of a possible rate hike.
Comments from the Joker
Well, the joker says that the rate hike would be expected but the words spoken in the press conference would be of utmost importance. The increase of more than 25 basis points can damage equities or any signal to increase the pace of rate hike can be brutal. However, Fed won’t repeat the mistakes ECB did in 2011. The fed expects to raise rates to 1.5% by the end of 2016.
The joker believes it is fair enough, given the slowdown in China and depressing energy prices would take time to recover. China’s initiative to put stimulus tends to be working as the latest GDP figures picked up by 6.85% along with an improved industrial production and retail sales. Their possible announcement of tracking yuan against different currencies rather than only linking it with dollar could make yuan more weaker boosting up exports.
To summaries, the volatility in markets have increased and all eyes would be on the fact that FED should maintain a dovish outlook regarding the rate hike and increase it moderately by 25 basis points waiting for inflation to grow. If they resurrect the vampire too early, then the east wind might blew up the curtains again making way for the sunlight.
Will Fed finally raise the rates after almost a decade???
Will Yellen be more dovish about the future rate hike outlook???
Will Santa come with gifts or this time all the socks would stink???
To find out … Follow the TRADE JOKER
Sources and References: The Economist, CNBC, Gulf News, Sydney Morning Herald, Reuters, Business insider, Chicago Tribune, The Globe and Mail, Malay Mail Online
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