Fed Raising Rates

23 Dec 2015 | Author: | No comments yet »

Asian Shares Retreat as Oil Falls, Fed Euphoria Fades.

There was a rare consensus among brokers and market experts that the US Federal Reserve’s rate hike was a non-event for the Indian markets, with most saying a marginal increase had already been priced in. Most Asian markets fell Friday after a strong week, as oil fell to a fresh low since the financial crisis and the rally following the Federal Reserve’s interest-rate rise dissipates.

In addition to the tightening labor market and the other data-driven reasons that Fed officials cited Wednesday for taking action, there would have been two very real, if more abstract, risks to not raising rates: a potential loss of confidence in the economy and a potential loss of confidence in the Fed itself. Investors appear to be shifting focus back to some of the factors that pressured stocks in recent weeks, such as the effects of the strengthening dollar on commodity prices, like oil. “The implications of further energy price declines are clearly putting the brakes on equities at the moment,” wrote Angus Nicholson, market analyst at brokerage IG, in a note. “A wave of defaults and bankruptcies in the energy sector still looks likely to come, and these concerns are certainly weighing on markets.” The slide in oil refreshes worries that energy firms will have trouble paying their debts, after a rout in the junk-bond market rattled investors in recent days.

While the Fed’s first hike (in a decade) was on expected lines, there is no certainty about when and how it will move with respect to subsequent hikes. As the head of research at a multinational brokerage firm points out, no one knows how the rate hike announced on Wednesday will impact the US economy. It’s not clear why inflation is so sluggish, or how many people without jobs would like to return to work. “Nothing is really resolved about the normalization process except that we’ve moved through this first tiny step,” said Tim Duy, an economist at the University of Oregon who follows the central bank closely. The Fed said on Wednesday that it would raise its benchmark interest rate to a range of 0.25 to 0.5 percent, ending a seven-year period of near-zero interest rates. But there are reasons to question the accuracy, or at least usefulness, of both of those headline numbers, given how few people are in the labor force and that ultra-low energy prices are distorting inflation indices.

Ltd, says, “In the near term, there are disappointments in terms of reforms and sluggish recovery, which could weigh on investor sentiment.” Based on its most recent fund managers’ survey, analysts at Bank of America Merrill Lynch wrote, “Global fund managers’ positioning in emerging markets remain near record lows, as they perceive the region to be a value trap with a weak earnings outlook, sharply slowing China growth and see continuing headwinds from a stronger US dollar and higher bond yields. A recession in China remains the biggest tail risk for global investors.” Investors now think China’s growth is likely to slow to 5.5% by 2018 (down from 5.9% last month), the report added. Ultralow interest rates have boosted equity markets in recent years. “It’s a delicate balance” that the Fed faces in the coming months in pacing subsequent interest rate increases, said Andrew Swan, head of Asian equities at BlackRock Inc.

The Fed is raising short-term rates in a new way, by paying banks and other financial firms not to offer loans at rates below the bottom of its benchmark range. On Thursday, however, firms offered only $105 billion to the Fed — less than the $114 billion average daily sum offered to the Fed during testing over the last two years.

Swan said the firm shifted into Asian equities over the past month, expecting investors to move back into riskier assets as worries eased about the first rate increase by the U.S. central bank. That caused a full-fledged crisis as foreign debts became harder to pay and tighter monetary policy was needed to stabilize currencies and rein in inflation.

In fact, even after Wednesday’s much-ballyhooed hike, today’s effective interest rate remains lower than it was at any point during the more than five decades leading up to the recent financial crisis. Still, if the government is able to push ahead with reforms and there is greater evidence about the economy’s recovery, investors may still well flock to Indian shores for the lack of alternatives. In other commodities, copper prices closed lower, with copper for March delivery down 1.4% overnight on the Comex division of the New York Mercantile Exchange. Government leaders and policy makers the world over have begun acknowledging the importance of developing smart cities as a means to enhance the quality of life of citizens. At least 20 of the world’s largest countries are expected to introduce national smart city policies to prioritize funding and document technical and business guidelines by 2017, according to research firm International Data Corp. (IDC).

Alternatively, low rates are necessary to preserve the modest pace of economic growth, and increasing them too abruptly could push the economy into recession. The Fed’s preferred measure of inflation — an index of personal consumption that excludes volatile food and oil prices — rose just 1.3 percent in the 12 months ending in October. Yellen and other officials have argued that temporary pressures like the fall of oil prices and the strength of the dollar are suppressing inflation, and that the strength of the labor market is a more important indicator.

Ltd, said, “The smart city concept, clearly a confluence of IoT and big data, holds promises for more efficient management of city services, innovative energy, water and transport services, and a deeper engagement with citizens—all leading to a rejuvenation of cities with sustainable economic development and a better quality of life.” He states that smart cities are not just about smart systems and technologies; they are a combination of digital, business and civic innovation. “It is the new data platforms, business models and engagement models that are creating city-wide digital ecosystems,” he said. Limiting surprises to markets helps preserve the credibility the Fed has painstakingly built up over the years, a goal that Fed Chair Janet Yellen has stressed before. According to Bettina Tratz-Ryan, research vice-president, Gartner Research, commercial and industrial buildings will benefit significantly from the introduction of IoT technologies as they provide integrated management based on big data collected from sensors in the facilities. “Especially in large sites such as industrial zones, office parks, shopping malls, airports or seaports, IoT can help reduce the cost of energy, spatial management and building maintenance by up to 30%,” she said. The value of enhancing the Fed’s reputation likely exceeded any negative, and perhaps negligible, consequences of raising rates by a mere 25 basis points. Lower commodity prices and a slowing Chinese economy are already causing stress, and a return to a more normal credit spread would especially hurt the most vulnerable companies.

Gartner predicts that in 2016, 90% of cities worldwide will lack a comprehensive set of policies on the public and private use of drones, sensors and devices, which will result in increased privacy and security risks. If General Motors has made a big bet on high-speed wireless connectivity throughout its vehicle fleet, luxury cars such as BMW, Mercedes and Audi are also becoming digitally enabled so that in the next few years, they become as mainstream as smartphones of today. Technology companies such as Google Inc., Hewlett-Packard Inc., and Apple Inc. are aggressively experimenting with both software and hardware, in different ways like self-driving cars and Apple CarPlay. “With more and more cars having embedded sensors and communication capabilities, car makers can design new services built around the ability of the car to interact with other vehicles and the surrounding infrastructure,” said Gaurav Bajaj, director, Audi Approved: plus, Kolkata. Plentiful reserves and the fact that lending is denominated in local currencies mean that Asian countries should be able to work out any bad debt problems on their own.

Floating exchange rates may be safer than the informally pegged rates of pre-1997 Asia, but they are far more dangerous than the fixed rates that prevailed before 1971. A federal agency said on Tuesday that credit risks were “elevated and rising” for American corporations and many foreign borrowers, even as investors are demanding significantly higher interest rates on junk bonds and foreign debt.

A March report by McKinsey & Co., however, notes that at a time when customer data is becoming the new profit centre, consumer privacy will remain a focal point of interest for consumers themselves as well as most likely for regulators. The report, by the Office of Financial Research, however, said overall risks to stability remained “moderate.” Banks, too, are taking larger risks, according to a semiannual report published on Wednesday by the Office of the Comptroller of the Currency.

The report said banks struggling to hit profit targets were loosening underwriting standards, particularly in high-growth areas like auto and construction lending. “In the area of credit risk, the warning lights are flashing yellow,” Thomas J. Recognizing the need for innovation in the hybrid vehicle space, the Indian government has launched a national plan with the goal of getting 6-7 million hybrid and electric vehicles on the road by 2020. Two companies, KPIT Technologies Ltd and Bharat Forge Ltd have jointly developed hybrid kits that can convert an existing vehicle into a hybrid and have patented the technology across the world. According to Rakesh Kaul, partner, government and public services at consultancy firm PwC India, the smart cities concept is built on four pillars— physical (infrastructure), social (health, education and entertainment), institutional (municipalities and city managers) and economic (ease of doing business in India). “The initiatives should be commercially viable, socially inclusive and maintain ecological balance,” he said.

Jeremy Stein, a former Fed governor who has returned to teaching at Harvard, has observed that higher rates have the virtue of addressing even unknown problems. Prashant Pradhan, director, smarter planet business, IBM India and South Asia explained that it will be important to measure the return on investment (RoI) in smart cities. “Where are smart cities heading?

Are they going to solve the challenges that can inhibit business growth, such as unsafe neighbourhoods, traffic congestion and a lack of workers with certain skill sets? Will the city continue to invest in areas of success like cultural events, car or bike sharing initiatives, clean parks, and resiliency plans for severe weather events? Banks were quick to take advantage of the Fed’s announcement on Wednesday to raise the rates they charge on many loans but not the rates that they pay to depositors. The plan to create 100 smart cities is expected to fuel the job growth further, believe experts. “Year 2016 will bring a large number of jobs in Tier-II cities with Digital India and Smart city initiatives and industries like manufacturing which has been struggling and competing with import pricing competitiveness will now have major boost and will be the largest job creator in India,” said GlobalHunt India Pvt.

Yellen, asked about that on Wednesday, suggested she did not see great reason for concern. “We have a far more resilient financial system now,” she said, “than we had prior to the financial crisis.” He said sectors like IT, ITES, e-commerce, BFSI, logistics and transport will become support systems for the manufacturing sector and create more jobs avenues.

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