Interest Rates

The Fed Signaling a More Restrictive Policy From the Expected

Last week was stable in the US stock indices, while Europe and Japan recorded increases of between 2% and 4%.

However, when on the one hand, an increase in tensions between China and the United States over the weekend, and the Fed’s decision, signaling a tighter monetary policy than expected in the US, hampered slightly on the capital market.

However, the government estimates that Trump will implement fiscal incentives to encourage the economic growth, and improved data in Europe provided a favorable tailwind.

Investors added $ 11 billion into stock funds last week. The Dow Jones index finished a sixth consecutive week of gains.

The global fear level was involved: The VIX index rose from 11.8 points to 12.2 points.

In contrast, government bond yields to 10 years in the US rose from 2.47% to 2.59%.

As expected, the Fed decided to increase US interest rate range of 0.5% -0.75%. This is the second interest rate rise in total in 10 years.

Only a few points in the speech of Fed Chairman Janet Wallen:

  • The Fed expects the interest rate will end 2017 in the range of 1.25% -1.5%.
  • The Fed expects three rate hikes in each of the three years from 2017 to 2019.
  • Fed members have examined the economy and they believe it is strong enough and is recovering at a satisfactory rate.
  • The labor market is strong and fiscal stimulus is not needed to reach full employment.
  • The monetary policy has achieved its goal with the arrival of inflation to its target (2%).
  • US regulation has improved the situation of the financial institutions in the US. It is important to maintain the regulation to avoid financial crises returning.

The market expectations are for two rate hikes in 2017.

It should be noted that in his statement accompanying the rate decision, there was not any reference from the Fed to the possibility of fiscal expansion planned by President-elect, Trump.

In such a scenario, it is quite possible that the pace of interest rate hikes in 2017
will be faster than expected in the market today.

The strongest sectors of the last week had been the media (+ 2.3% last week, the sector that stands up over 20% this year), as well as the pharmaceutical sector, after hard several months, and it is the only sector showing negative returns in 2016.

The weakest sectors last week were Industries and raw materials, after their strong gains recently.

In Europe, the EuroStoxx600 index rose for the second straight week, by 1.3%, led by energy industries (+ 3.9%), technology (+ 3.2%) and communications (2.5%%), good performance are particularly for the big exporters, which are supposed to benefit the weakness of the euro, assuming that it continues.

Japan is the best stock market’s in the current quarter (developed markets) with a yield of 18% and is favored by many strategists also to 2017.

However, you should take into account the current quarter, the yen weakened by 14% against the dollar, so in fact, almost all of the return came from the currency.

The Bottom Line:

The cross-section of the investment options in the U.S. – Preferred overexposure to the oriented domestic operations (such as the Russell2000 index of SMEs which generate the majority of their revenues in the US), compared to export-oriented options and multi-national activity (such as the S&P500 Index consisting of large companies, owning a broad global exposure).

Sectoral cut in the U.S. – expectations of faster growth in the United States, accompanied by the strengthening of the dollar, are major factors supporting investment in sectors with high exposure to the US local economy.

Accordingly, the financial sector is expected to benefit from the economic recovery, the increase in interest rates and the steepness of the yield curve.

the energy sector enjoyed an increase in prices oil and gas, and manufacturing industries and basic industries, are expected to benefit from the implementation of infrastructure investment program, and look interesting for investment.

On the other hand, sectors that considered to be defensive, as the basic consumption, infrastructure, and income-producing properties, that are negatively affected by the increase in yields, seem to be less interesting at this point.

The cross-section of stock indices and sectors in Europe – it’s better to focus on the export-oriented Indices and sectors, such as stock indices in Germany, the UK and the Netherlands (hedge by nature) as well as in the health sector and industry.

These indices benefit from the positive momentum in the earnings forecasts and tend to show a strong performance in times of depreciation of the euro, as since the election of Trump for president weakened the euro by about 5%.

About the Author Investegies Team

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