Rate Hike Spells Doom For Precious Metals Investors

23 Dec 2015 | Author: | No comments yet »

Fed hike clears path for Bank of England, but not right away.

And given the Fed’s promise of a gradual path ahead, the real test will not come until later next year when its forecasts are tested. “Generally if you’re in an interest rate tightening cycle, it’s because you’ve got better economic conditions,” says fund manager Darren Thompson from Northward Capital who holds stocks such as Brambles and James Hardie, both of which are linked to the US economy. “We think overall they’re good businesses at decent valuations, but also the environment is robust enough to support their business and help them grow.” In domestic equities, expectations were reset after the correction in August. The British economy is likely to be among the world’s fastest-growing for a third year in a row next year and, just as in the United States, it has seen a drop in unemployment. But faced with near non-existent inflation, sluggish wage growth and ultra-loose monetary policy in Britain’s main euro zone trading partners, Carney has already stressed he would not necessarily move in step with his Fed counterpart Janet Yellen.

To be sure, he sent signals in July that a decision on whether to raise rates for the first time since 2007 could become clearer around the end of this year. And as late as October, some analysts were betting on the Bank of England (BoE) following hard on the heels of a U.S. move. “I think it will be difficult for the Bank of England to tighten monetary policy … until headline inflation reaches 1 percent again,” said David Page at AXA Investment Managers.

We know this because the Fed, unlike the Reserve Bank of Australia, issues forecasts for the targeted level of interest rates years in advance based on its internal survey. But as his predecessor Mervyn King – who was criticised for responding too slowly to the 2007-9 crisis – found out, the exact timing of any move is a delicate balancing act.

The median forecast by Fed participants is for a Fed funds rate of 1.375 per cent by December 2016 but traders are only seeing rates rise to 0.835 per cent. “An early Fed tightening cycle – apart from 1994 – needn’t kill the equity bull market, it’s only in the latter stages when inflation is picking up,” says David Bassanese, chief economist at Betashares Capital. Carney’s previous hints of a British rate rise have been knocked off course by the twists and turns of the world economy, including the plunge in global oil prices which at one point sent British inflation tumbling to below zero. That’s because corporate earnings benefit from the early stages of a cyclical upswing while borrowing costs are still low. “The Fed is like a double-edged sword – on the one hand it’s raising interest rates which adds some risk because it pressures valuations in the equity market and the US housing market. But it also helps reload the cannon in the sense that if you think the economy is good, it gives them scope to respond to another crisis down the track. “Unlike our central bank, they seem to feel less compulsion to worry about potential asset price bubbles.

If the RBA was running the US Federal Reserve and Glenn Stevens was the Fed chair, he would have tightened two years ago.” Some pockets of the market were already looking vulnerable ahead of the Fed decision.

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