What do you think Fed would base their arguments for a fed rate hike? DO u now think that external market factors are contained and the climate is different compare to what it was in September?
The Fed does have confidence when it comes to the US economic growth, although the situation is remarkably anaemic when we gawk the ISM manufacturing and services data. However, this factor gives them leverage to downplaying their rate hike move – hence we will see the Fed raising the rates with excessively dovish view. It is something which is in complete contrast to what the ECB did, they lowered the interest rate and missed the market expectation by far. But, again the central banks ae not there to tickle the markets, but to effectuate the economic requirement.
The Fed undoubtedly feel more confident when it comes to external factors such as emerging markets and if they increase the interest with dovish stance, it will keep a tight lid on the US dollar, which will perhaps not be able to shoot straight up and rather the move could be more of a grind. If the dollar goes up in a very straight line up that is too much of a trouble for the emerging market, but a gradual move will not be that much of a qualm.
What sort of tone do you expect from Fed in the December meeting about next year? When do you see the next fed rate hike and if they will be quick or slow and the reasons for those arguments?
We are envisaging the Fed to be very dovish, they cannot afford the strong dollar, because this will have even more bigger impact on the ISM manufacturing index, which is utterly week. The trajectory for the dollar hike will be very gradual because with Fed increasing the interest rate, it drains out the liquidity in the financial system. A twenty five basis point for instance will drain out nearly 800 billion dollar from the system that is more than the QE2. When the Fed started their QE2 back in November 2010 and the S&P 500 rallied on the back of this, until July, they nearly pumped $600 billion. So, there is our math and one would have to think how that will impact the system.
How should investors play now in the divergent monetary policy scenario? What they should be overweight and underweight on? Where should they increase or decrease exposure?
If history tell us anything- it is this that fighting central bank is not a good element. The European Central Bank is still on the path of quantitative easing and this mean that more growth opportunities will be in the Eurozone and this is where you want to keep most of the exposure. As for the US, the growth path will be very gradual and if you want to play safe, that is your option. However, we do think gold is buy at these level, because we have seen that as the Fed are preparing for the rate hike, we have not seen that intense sell off for the precious metal as it was previously estimated. Moreover, with Fed increasing the rate, it also represent liquidity issue and therefore, one need to hedge and the yellow metal gives you that opportunity. From a longer term perspective, it could turn out to be a good investment, especially if it drops below the 1000 level.
What about the funds flow? How would that pan out given the change in stance by the Fed?
We could see money flowing in the eurozone as the ECB is committed to its stimulus package. Moreover, funds may also start to flow in the US as well.
Disclosure & Disclaimer: The above is for informational purposes only and NOT to be construed as specific trading advice. responsibility for trade decisions is solely with the reader.
by Naeem Aslam