November 19 2017

Global shares fall on Fed rate hike, UK rate outlook

November 19 2017, 12:52 | Clarence Walton

Global shares fall on Fed rate hike, UK rate outlook

Tech stocks lead broad decline on Wall St

"With the Chinese economy moderating and Asian exports showing signs of moderating from the first quarter's stupendous recovery, any hope of a significantly stronger showing from the Singapore economy is likely misplaced".

Minneapolis Federal Reserve President Neel Kashkari said on Friday that he dissented on the US central bank's decision earlier this week to raise interest rates because of worries about a recent drop in inflation. Also, banks will earn more from the money that they need to keep at the Fed compared with low income from this source in the low-rate environment that has prevailed since the last financial meltdown.

Contrary to what many expected, Treasury bond exchange traded funds were among the best performers after the Federal Reserve raised benchmark interest rates for the third time in six months.

Besides, as Europe's "macros" and political environment continue to improve, Analysts expect that the European Central Bank could begin normalising policy by the end of 2017 or early-2018.

The Fed's normalization plans failed to revive US bond (SCHO) yields as demand for relatively higher-yielding US Treasuries remained high amid abundant liquidity in other developed economies. In short, the economy is sending mixed signals: "a tight labor market and weakening inflation".

"What I can tell you is that we anticipate reducing reserve balances and our overall balance sheet to levels appreciably below those seen in recent years but larger than before the financial crisis", Fed Chair Janet Yellen said in a press conference following the release of the Fed's policy statement. The yen's strength within the past month may pose a concern to the BoJ, and the central bank could potentially subdue rumors that it intends (or will be forced) to start winding-down its extensive stimulus program.

"Market pricing suggests more than 50% probability that the Fed will not raise rates again this year".

AUD was well supported after a surprisingly strong labour market report, which saw the unemployment rate drop to 5.5%, its lowest level in four years. But, with inflation having undershot its target for five years now, Yellen and her colleagues are vulnerable to the charge that they are still playing by the old rules and reacting to a nonexistent, or very minor, threat.

The Federal Reserve was able to modestly raise rates because of the U.S. economy's relatively strong performance, in comparison with the United States or Europe.

Park Seong-woo, an analyst at NH Futures, said the household debt problem will make it hard for the BOK to raise its rate this year, despite Gov. "Three percent is well above the current 10-year Treasury yield". And Bank of America will earn approximately $150 million more each quarter for every 25-basis-point increase in rates. For now, the yield spread between the two- and 30-year maturities fell to about 143 basis points, approaching the almost nine-year low set in August. It would start implementing those policies this year, assuming economic growth continues. It forecast that prices will rise just 1.6 percent this year, down from a March forecast of 1.9 percent. Hawks tend to worry that rates kept too low for too long could escalate inflation or fuel asset bubbles.

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