Interest Rates
With the US being the largest economy in the world, US interest rate rises have implications for both global and domestic financial markets. The first rise in the key ‘Fed Funds’ rate since the 2008 financial crisis took place last December (a rise from 0.25% to 0.50%) and markets keenly anticipate the next rate rise as the US Federal Reserve seeks to ‘normalise’ interest rates by raising from post financial crisis emergency levels.
The market had begun to anticipate a June rate rise from the US Federal Open Markets Committee (chaired by Janet Yellon). The FOMC meeting 8 times a year to analyse the domestic and international environment and make such interest rate decisions.
US Economy
After Friday’s May US employment (‘Non-Farm Payroll’) numbers the market now expects such a rate rise only in September. Expectations were for 160,000 jobs to be created and filled in May. The reality was only 38,000 individuals were hired; the weakest monthly hiring number in six years. The economy is not currently robust enough for a rate rise.
Market Reaction
- With interest rates remaining low, current bond yields looked attractive all of a sudden with the yield on the 10 year US Government/Treasury bond falling from 1.80% to 1.71%; a big move (yields down means bond prices up!).
- Bank shares fell due to the ongoing low interest rate environment as it is harder for banks to charge high margins when rates are low.
- The US Dollar fell versus other currencies on the news. With the Euro up 2%, this was an unwelcome development for the European Central Bank as they need a weak currency for the Euro bloc to export its way to economic recovery.
Generally stock markets, currencies and commodities have been relatively stable over the past few weeks and a long way from the dramatic and volatile markets of the first quarter of the year. Oil is stable at just below 50 dollar per barrel, a long way off the $27 pb of January.
Brexit
The June 23rd In / Out referendum is seen as a global rather than a domestic event as any Out vote could be a catalyst for Eurozone unravelling. The financial markets want and expect a Remain In vote as they would prefer the UK to remain in the current EU trading bloc and any Out vote would create considerable uncertainty over the next couple of years. The FTSE 100 index and Sterling have been strengthening on any solid Remain poll and weakening on the opposite news. Option markets are pricing in about a 10% fall in UK equity and currency markets should the unexpected Out vote happen.
Equities
S&P 500: 2099
Nasdaq: 4950
FTSE 100: 6200
Bonds – 10 Year Government Yields
US 1.71%
EU 0.07%
GB 1.41%
Foreign Exchange
EUR/USD 1.1300 (1 euro buys 1.1300 dollars)
GBP/USD 1.4500 (1 pound buys 1.4500 dollars)
Commodities
OIL: Brent: 49.00 (dollars per barrel)
GOLD: 1240 (dollars per ounce)
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Paul McCormick
