Fed rate rise to see heightened volatility for 2016
NEW YORK: With the new year right around the corner, many analysts expected volatility could rise in financial markets after US Federal Reserve’s first rate hike in nearly a decade. The US central bank announced early this week raising benchmark interest rate by 25 basis points, the first rate hike since 2006, marking the end of an era of extraordinary easing monetary policies.
US experts set to diverge on expectations of US stocks outlook next year. “We expect the S&P 500 to continue climbing next year,” said Savita Subramanian, head of US Equity and Quantitative Strategy at Bank of America Merrill Lynch.
The S&P 500 is expected to rise to 2,200 by the end of 2016, a price return of approximately 5 percent, beginning a slow trajectory toward 3,500 in 10 years, Subramanian added.
“With credit-sensitive investments the biggest risk in 2016, the S&P could be viewed ultimate anti-credit play: large, liquid stocks with healthy balance sheets and above average cash balance,” Bank of America Merrill Lynch said in a report on the 2015 outlook released in early December.
Some analysts, however, believed the stock markets would witness some volatility in the coming months as Wall Street tries to digest the rate hike decision. “Unless companies surprise us with earnings for the year, the markets will have a difficult time in 2016,” Keith Bliss, senior vice president at Cuttone & Co., told Xinhua in a recent interview.
“We are very far along in the corporate profit cycle, US economic growth will still be in the 2 percent range — in a rising interest rate environment, the global economy will be anemic, and the dollar will still be stronger as monetary policy in the US diverges from policy overseas,” Bliss added. US Fed Chair Janet Yellen said policies would remain accommodative and that the significance of the first hike should not be overblown.
The US dollar might continue to surge against other major currencies in the first couple of months of 2016 as the Fed decided to raise interest rate, while central banks in Japan and Europe were expected to unleash further stimulus.
Robert Savage, CEO of fund management firm CCTrack Solutions, told Xinhua that the US dollar index will climb up in the first half of 2016 and down in the second.
“I think the risk is that Fed does more hikes than is priced in 2016 and (the dollar) so persistently outperforms other major G10 currencies,” Savage added. Strong US dollar and an interest rate hike could create downward pressures on commodity prices, including energy, metals and grains. “The only thing I see getting the way of hike could be the price condition in the commodities markets, oil and other commodities also,” Stephen Guilfoyle, managing director at Deep Value, told Xinhua in an interview, “it’s a definitely problem there.”
Oil prices were dragged down by the global supply glut and continued to hover near a seven-year low after the decision of the Organization of the Petroleum Exporting Countries (OPEC) on Dec. 4 to keep crude production pumping at the current level in the already oversupplied market.
As it will take years to wash out the whole supply in oil market and reach the balance point where supply meets demand, many analysts do not expect oil prices will recovery soon.
“For the time being, the most decisive move has been in commodities, where a tightening Fed is pretty clearly bad news no matter what follows from it,” said Chris Low, chief economist at FTN Financial, earlier in a note. However, the Main Street is expected to outperform the Wall Street as the tailwind of low rates, oil prices and rising employment continued to benefit consumers, according to the report from Bank of America Merrill Lynch.
If there is an improvement in the economy, and the wages do rise, consumer-spending sectors might get benefit based on the habits of US consumers, said Guilfoyle.
“We’re seeing an aging bull market with a lot of upside potential in it, but also the beginning of slow, steady growth in the capital markets and innovation-led shifts in business cycle,” said Candace Browning, head of Global Research at Bank of America Merrill Lynch.The greatest opportunities for investors may be found among carefully selected, healthy dividend-paying stocks and thematic investments in innovators reshaping market dynamics over the next decade, Browning added.