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Attention on Federal Reserve independence after bruising week

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With the US share markets about to open on the final day of what has been a turbulent week, what can traders expect next week and should we be anticipating more heavy selling? Analysts in the US are still positive on the outlook for the US economy, as is the Federal Reserve, which says it is still on course to raise US interest rates in December.

The Fed’s policy has diverged to some extent from other major global central banks, with the European Central Bank yet to raise rates since the Eurozone crisis. The Bank of England raised UK rates in the summer, but right now is not looking like it has the guts to follow in the footsteps of the Fed, partly because of uncertainty still surrounding Brexit. The Fed, described this week by Donald Trump as ‘loco’ seems largely responsible for the strength of the US dollar and the underperformance of US treasuries.

The yield on the US benchmark 10 year treasury bond hit its highest level since 2011 this month, which rattled investors in North American equities.

“Higher interest rates can prove problematic for companies and consumers alike, raising borrowing costs, and reducing the availability of credit,” says UK stock broker Killik in a note to investors this morning. “However, with the strength of the US economy and core PCE, the Fed’s favourite inflation metric, currently in line with its 2% target, the Fed’s decision to move away from the ultra-easy monetary policy that characterised the years following the financial crisis is arguably justified.”

This morning both London and the main European markets were in positive territory as were the key Asian market indexes. Gold and oil prices were also up. However the MSCI’s broadest index of Asia Pacific shares outside Japan is now set for a weekly loss of over 4%, although in the Greater China region the Hong Kong Hang Seng index was up 1.16%.

“Sentiment does remain fragile, having been initially a reaction to the sudden rise in US bond yields, the selling has taken on a broader risk-off guise,” warns Neil Wilson, chief markets analyst at Markets.com. “That means that whilst we initially saw bonds and stocks sold off in lockstep, we are now seeing bid for bonds as investors seek those attractive yields.”

Wilson sees this as a broad-based sell off. Two thirds of the S&P 500 is in correction territory, he says, while over a quarter is in full bear market territory. The selling is also taking place in very high volumes.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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