Podcast 19th May 2016
Hi I am Arjun Parthasarathy speaking and this podcast is on “Fed June Rate Hike and its Impact on Sensex, Nifty, Ten Year Gsec and INR”
Fed officials are now being more vocal on rate hikes and markets are now starting to expect the second rate hike as early as June 2016. Read our latest “Weekly Global Bond Yield Movement Analysis on Fed Rate Hike”. Fed first hiked rates by 25bps in December 2015 after a gap of eight years to take up the policy rate from a range of 0% to 0.25% to 0.25% to 0.50%.
Fed when they hiked rates in December, signalled four more rate hikes of 25bps each in calendar year 2016. However given issues of volatility in financial markets in the beginning of 2016 on the back of a China economic slowdown, markets started to price in fewer than four rate hikes by the Fed. A June rate hike was taken off the cards by the market but now a June rate hike is a strong possibility.
What will be the impact of a June Fed rate hike on markets?
The fact that markets are having a lot to contend with at present makes a Fed rate hike a high impact event on the markets. Global equity, currency, bond and commodity markets have seen high volatility in the first five months of 2016. Global equities dropped sharply at the beginning of the year before climbing back but are still down from highs seen last year. Currencies have seen USD lose its strength, sharp rise in value of Yen and Euro and a fresh fall in EM currencies. Bond yields plunged on negative rates globally. Commodity prices have risen from lows with oil rising by over 30% and gold by 18%.
The Sensex and Nifty fell to one and half year lows in the beginning of 2016 before pulling back while the ten year bond yield climbed to one year highs before falling. The INR threatened to drop below record lows of Rs 68.80 in February but then strengthened on the back of a good budget. The INR is now falling again on worries of a Fed rate hike.
Indian equities, bonds and the currency will see volatility as market expectations of a Fed rate hike rise. FII’s are more likely to be sellers than buyers until the event is over. Investors would wait for fresh guidance from the Fed before taking any directional call on markets.
Once the event is over, markets will start looking at more fundamental factors such as corporate results, progress of monsoons, strength of the global economy and then regain its poise.
Given that interest rates are down, inflation is stable at lower levels and government is spending on infrastructure, outlook for the Indian economy is more positive than negative. Globally too, weak spots like Eurozone and Japan have seen higher economic growth in the first quarter. On an overall basis, markets are more likely to bounce back if there is a fall going into the Fed policy.
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