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- Nov 26 2015 at 2:15 PM
- Updated Nov 26 2015 at 4:19 PM
Investors are right to be nervous about a US rate rise
[img=620x0]http://www.afr.com/content/dam/images/g/k/x/u/t/w/image.related.afrArticleLead.620x350.gl8bll.png/1448515186048.jpg[/img]Federal Reserve Chair Janet Yellen has to decide whether to raise rates or not. AP
[Image: 1435901920075.png]
by Philip Baker
There's a very good reason why sharemarket investors are getting antsy about higher interest rates in the United States. They tend to lose money when rates start to go up in the world's largest economy.
Although it has been almost a decade since the last rate hike, it's not as if tightening cycles is unusual.
Over the past 40 years there have been seven of them, on average one every 5.7 years.
History shows that on average there has been a recession in the US every six to seven years since 1947, and double-dips within eight years of big recessions like the Great Depression.
[img=620x0]http://www.afr.com/content/dam/images/g/l/8/r/p/7/image.imgtype.afrArticleInline.620x0.png/1448511003582.png[/img]AFR Graphic
SHARES GO SOUTH AS RATES GO NORTH
But the problem for equity investors and rate hikes is that on six of those seven occasions shares in the US have posted negative returns in the first year after rates have started to head north.
And Wall Street still dictates where all other sharemarkets go.
However, according to Perpetual, on six of those seven tightening cycles, shares have risen 25 per cent or more in the subsequent three years on the back of a better economy that led to higher earnings, which in turn helps dividends.
The accompanying graph shows how shares have done in the first year of a tightening cycle and then the years after.
For that reason investors should concentrate on when the second rate hike will be rather than the first, although that first one will cause a few problems when it does eventually hit.
RUDE HEALTH
That said, financial markets are showing some signs of rude health in the lead up to it.
In the past there has been all sorts of last-minute behaviour before rates rise.
For example, companies with very low or no credit ratings look to raise as much money as they can in the junk bond market, fearing they won't be able to do so once rates rise.
But right now investors are showing signs of being discerning in the junk bond market, shying away from the really bad names, but happy at a price to back the better-positioned companies.
Some experts say that it's a real sign of a healthy financial market when investors sidestep the very risky deals.
If that's so then maybe markets are in a better frame of mind heading into a rate hike than originally thought. On Thursday the major S&P ASX 200 index was up 1 per cent and helped put the index in the black for the month of November.
According to Bloomberg, the US junk bond market is open to only a few select companies, while traders are very quick to punish companies if they reveal just the slightest piece of bad news.
In the past, with rates at record lows every company would be looking to lock in cheap money.
HAVES AND HAVE NOTS
But credit spreads have widened and there seems to be a two-tiered market with the haves and the haves not.
How investors differentiate in the junk bond market where all borrowers are known to have their risks is maybe a sign of a healthy market.
Despite investors staring down the barrel of losses in the junk bond market for the first time since 2008, speculative-grade borrowers have managed so far this month to issue twice as many bonds as in October, about $US26 billion ($36 billion).
That's the busiest junk bond desks have been since May but the supply was courtesy of a number of companies that are in good shape with a bright outlook and they were willing to meet the higher yields, as much as 13 per cent, that fund managers now need to invest in them.
Despite the increase in activity this month, year-to-date issuance stands at $275 billion, down almost 22 per cent when compared to 2014.
The cost of borrowing for some of these companies is at a five-year high.
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AI, seems is the next killer tech, both in US and China...
Tech titans pledge S$1.4 billion for artificial intelligence research
SAN FRANCISCO — Several big-name Silicon Valley figures have pledged US$1 billion (S$1.4 billion) to support a non-profit firm that yesterday (Dec 11) said it would focus on the “positive human impact” of artificial intelligence.
Backers of the OpenAI research group include Tesla and SpaceX entrepreneur Elon Musk, Y Combinator’s Sam Altman, LinkedIn co-founder Reid Hoffman, and PayPal cofounder Peter Thiel.
“It’s hard to fathom how much human-level AI could benefit society, and it’s equally hard to imagine how much it could damage society if built or used incorrectly,” read the inaugural message posted on the OpenAI website.
“Our goal is to advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by a need to generate financial return,” the statement read.
The OpenAI funders “have committed US$1 billion, although we expect to only spend a tiny fraction of this in the next few years.”
...
http://www.todayonline.com/tech/tech-tit...e-research
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Finally a baby-step for the rate hike. The Singapore board interest rate will follow soon. SIBOR already hiked several time this year...
Fed raises interest rates for first time in a decade in 'dovish hike'
WASHINGTON (Dec 17): The Federal Reserve hiked interest rates for the first time in nearly a decade on Wednesday, signaling faith that the US economy had largely overcome the wounds of the 2007-2009 financial crisis.
The US central bank's policy-setting committee raised the range of its benchmark interest rate by a quarter of a percentage point to between 0.25% and 0.50%, ending a lengthy debate about whether the economy was strong enough to withstand higher borrowing costs.
...
http://www.theedgemarkets.com/sg/article...ovish-hike
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Going to get more ugly for emerging economies. Good thing things in singapore is peg somewhat to usa.
Bye bye reits and debt laden property stocks..
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This is the base for market expectation. A interest rate of 1.25% by the end of the year 2016?
Fed's Fischer says four rate hikes in 2016 'in the ballpark'
WASHINGTON (Jan 7): Federal Reserve Vice Chairman Stanley Fischer said that the median of policy maker forecasts predicting four quarter-percentage point interest-rate increases in 2016 was "in the ballpark", though it wasn't possible to know the exact number now.
"The reason we meet eight times a year is because things happen, and as they happen you want to adjust your policy," Mr Fischer said in an interview Wednesday on CNBC.
...
http://www.theedgemarkets.com/sg/article...6-ballpark
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(07-01-2016, 10:44 AM)CityFarmer Wrote: This is the base for market expectation. A interest rate of 1.25% by the end of the year 2016?
Fed's Fischer says four rate hikes in 2016 'in the ballpark'
WASHINGTON (Jan 7): Federal Reserve Vice Chairman Stanley Fischer said that the median of policy maker forecasts predicting four quarter-percentage point interest-rate increases in 2016 was "in the ballpark", though it wasn't possible to know the exact number now.
"The reason we meet eight times a year is because things happen, and as they happen you want to adjust your policy," Mr Fischer said in an interview Wednesday on CNBC.
...
http://www.theedgemarkets.com/sg/article...6-ballpark
Haha they wanted to start hiking early as well last year before all the China stock crash drama.
Now that similar situation is coming up, they are very likely to delay any hikes...
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To hike or not depends on US employment and Inflation figures. Another i observe is the ballooning US property price which can be a serious concern later if rates are not curtail.
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(07-01-2016, 11:00 PM)corydorus Wrote: To hike or not depends on US employment and Inflation figures. Another i observe is the ballooning US property price which can be a serious concern later if rates are not curtail.
Check this out: http://www.valuebuddies.com/thread-5133-...#pid119813
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if China slow down delay rate hike. if US internally got risk of ballooning debt then use buy back again. alternative method is to sell the assets they bought during crisis if in demand by investors which will internally boost usd.
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The fear level is pretty high in US market. I reckon, similar with other key markets
U.S. stock funds bleed: see biggest outflows since September - Lipper
NEW YORK - Investors pulled more than $12.2 billion out of U.S. stock funds over the week that ended Jan 6, Lipper data showed on Thursday, slicing their risk as U.S. markets tumbled.
The withdrawals struck both mutual funds and exchange-traded funds during a week that saw concerns about a slowdown in China weigh heavily on U.S. markets. Taxable bond funds saw $2.7 billion in withdrawals during the same period.
Stock funds had their worst week in terms of outflows since September, while international stock funds posted moderate inflows of $157 million. Investors also pulled money out of money market funds.
...
http://www.todayonline.com/business/us-s...iod-lipper
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