UPDATE 2-US rate liftoff smooth but path seen rocky

23 Dec 2015 | Author: | No comments yet »

If Fed keeps hiking rates, stock rally could sputter next year.

History shows that the U.S. stock market holds up pretty well during the first couple of rate hikes, but begins to sputter after the third and fourth, says a new report from Citigroup.

Contrary to apprehensions stock markets might capitulate following an interest rate hike by the US Federal Reserve, global equity benchmarks were gainers on Thursday after the Fed raised rates by 25 basis points on Wednesday, reports fe Bureau in Mumbai.Economic data pointed to continued healing in the labour market, which could prompt more rate hikes from the Fed next year. “Finally we’re going to the script that the Fed would like to write, and this ought to be welcomed by the stock market”.

Most Asian markets rallied more than 1% with the Shanghai Composite, Japan’s Nikkei and benchmark indices from Taiwan and Indonesia leading the charge. Declining issues outnumbered advancing ones on the NYSE by 2,016 to 1,048, for a 1.92-to-1 ratio on the downside; on the Nasdaq, 1,884 issues fell and 962 advanced for a 1.96-to-1 ratio favoring decliners. Activists with the Center for Popular Democracy protest a likely increase in the interest rate by the Federal Reserve in front of the Federal Reserve headquarters in New York, Dec. 15, 2015. Its current projections suggest that there could be an additional four rate hikes next year. “History suggests that the first Fed Funds rate hike does not unsettle markets, but the third or fourth does generate concern,” said Tobias Levkovich, U.S. chief equity strategist at Citigroup. “Given Citi’s economists’ view of the Fed taking the funds rate to 1.0% by the end of 2016, it is fair to suggest that the equity rally could be restrained by the latter half of next year.” “A more positive outlook for Financials, Technology and Energy is appropriate with the Energy perspective being as controversial as the Underweight stances on Consumer Discretionary and Health Care,” he said. “We view predictive valuation factors for price performance as quite favorable for Banks, Insurance, Integrated Oils and Oilfield Equipment & Services but less so for Pharmaceuticals and Biotech as well as Consumer Services and Specialty Retail.” But there are risks.

The Fed made clear that the 25-basis point rate hike was a tentative beginning to a “gradual” tightening cycle, and that in deciding its next move it would put a premium on monitoring inflation, which remains mired below target. One of the biggest is the potential for policy errors by central banks next year as the Fed begins to diverge from the other major central banks. “Policy errors by central banks and widening credit spreads represent other factors that must be considered not to mention always pervasive though unpredictable geopolitical developments,” Levkovich said. China’s slowdown has been transmitted to the rest of the world through a fall in oil and commodities prices, said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, N.Y., which he said “is raising serious questions about global demand and the global economy”. The committee’s indication that the monetary policy stance remains “accommodative” as it looks to achieve its target inflation rate of 2% even as it recognised the strength in US economy allayed fears of steep normalisation in US interest rates which have stayed near zero (0.25%) for nearly seven years.

Qihoo 360 was up 1.8 percent at $73.10 after the Chinese mobile security software maker said it would be taken private for about $9.3 billion, including about $1.6 billion in debt.

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