The release of the minutes from the Federal Reserve’s last meeting has seen the market take down the possibility of a rate rise from 50/50 to a 1 in 3 chance in September. It is worth remembering that this meeting took place before the devaluation of the renminbi last week.
Equity markets in the past have taken a more dovish set of minutes to rally. This was not so following last night’s release. The bears have taken hold of equity markets in the summer months as global growth concerns resurface, corporate earnings growth remains weak and now concerns over an Asian currency war.
Rising rates have traditionally been good for stock markets, as it has reflected a strengthening economy. It’s when rates peak that stock markets tend to peak as well. Global interest rates are currently at a 5,000-year low, according to Merrill Lynch, this was the Bronze Age, and before Egypt had built a pyramid. Since the last Fed hike approximately nine years ago there have been over 650 cuts in global interest rates. For those anticipating a rate rise, Japan cut interest rates to zero nearly 20 years ago, and that is where they have stayed.
August is often either not a good time, or a good time for equity investors depending on your point of view and time horizon. We often point out it’s a volatile month as most money managers are away on their holidays, and at times like this will not rush to commit more capital. Crisis brings opportunities and for those with patience and the stomach for it times like this offer opportunities. There is an old adage that investors don’t want to be seen to be catching falling knives. It is better to buy when the trend has turned rather than trying to guess the bottom, and that may be what’s happening currently.
Many market commentators have feared the first rate rise, believing that the move to tighten liquidity will undermine risk assets, as zero rates has been responsible for propping up equities over the past few years.
This is mere speculation but could we now be at the point where equity investors would welcome a rise in rates, all be it a modest one? It could suggest the Federal Reserve do not fear a currency war with China. A rate hike could also suggest the Federal Reserve is comfortable that the economy is finally starting to pick up.
We will only know in September when the markets react to what the Federal Reserve announces. It is not beyond the realms of possibility that the Federal Reserve raises rates and equity markets greet the move positively. In the short term, it’s hard to see what is going to encourage investors from the sun bed and into the dealing room.