Fed Rate Hike: The Impact will not be anything as Bad as Last Year

As the Fed hiked rates by 25 basis points on December 14th, it brought back memories of the last rate hike in December 2015 when the global markets lost nearly $12 trillion in terms of market capitalization. The question is whether such a scenario could replay again this time around. It is highly unlikely for 4 key reasons…

Rate hike was on expected lines…

Back in December 2015 the traders were hoping against hope that the US Fed would maintain status quo once again. However, the Fed chose to hike rates by 25 basis points. The impact was much greater last time around as it was the first time in nearly 7 years that a rate hike was being implemented. In December 2016, the rate hike was almost a consensus expectation. Not just the rate hike but even a sharper trajectory was factored. The CBOE futures were already indicating a high probability of rate hikes during 2017.

Monetary divergence limited…

The big risk last year was monetary divergence. The US was turning hawkish while the EU and Japan remained steadfastly dovish. Things are beginning to change. The EU has continued with its bond buying program but has reduced the quantum from $80 billion per month to $60 billion per month. This is a sign of tapering of the easy money policy in the EU. Also, Japan has set a target of keeping its 10-year G-Sec yields at above the Zero mark. Both these points indicate that the risk of monetary divergence will be limited.

Emerging Markets are less fragile…

Back in 2015, most Emerging Markets were already in a fragile state. The sharp fall in oil prices coupled with cuts in commodities had piled up losses. Secondly, China appears to be showing green-shoots of growth this year as compared to last year. Commodity demand from China is showing signs of picking up. Back in December 2015, the EMs had just emerged from a huge currency war which had begun with the Yuan devaluation in September 2015. The collateral impact on EMs is likely to be limited this time around. With EM currencies more stable, the FPI outflows may not be as steep as last year.

US to grow in tandem…

This change has come after Trump’s plans to cut taxes and invest $1 trillion in infrastructure. Back in 2015, most analysts and traders saw the rate hike as a reversal of America’s easy money policy. This year it is different. The rate hikes are designed to counterweigh the impact of higher growth, higher incomes and higher consumer spending in the US. That may be the good news for global markets. That will also be the reason the market reaction could be more muted this time around!

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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