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Global equity markets continue to be volatile and, in the case of the US, approximately 10% down from the all-time highs reached in September 2018.Those concerns principally centred on

  • Rising US interest rates (increasing the cost of borrowing for companies and making bonds relatively more attractive as an investment vehicle compared to stocks).  
  • Ongoing US-China trade wars/tariffs threatening global free trade and therefore becoming a challenge to global growth.
  • Disappointing technology company results, especially Apple, again feeding concerns about global growth.

Interest Rates

The rising interest rate environment in 2018, spooking the markets, saw the  key US Federal Funds rate raised 4 times (4 x 0.25%) in 2018 and, as recently as September, the Federal Reserve led the markets to expect 3 more 0.25% ‘Fed Funds’ rate rises in 2019. (The Fed Funds is currently trading 2.25-2.50% – it always trades in a range). If the Fed followed through with such rises then that would take Fed Funds to 3.00%-3.25%). The Fed would have achieved its objective of ‘normalising’ interest rate policy i.e. bringing interest rates back to normal levels and rather than ‘emergency levels’ associated with the Financial Crisis.

However, at last week’s Federal Reserve (FOMC) meeting, the Fed did what was described as a monumental U-turn and talked in a much more ‘dovish’ manner about 2019 interest rate rises, saying it would be “patient” leaving the market to now expect zero or one 0.25% rise in the Fed Funds rate this year.Why did it change its policy?-for pretty much the same reasons stocks have been falling; worries about the global economy, trade concerns and adding the prospect of a ‘disorderly Brexit’ dragging down European growth.

Bonds and equities responded favourably to this softer Fed tone on interest rates.

If the Fed does take an easier tone on interest rates, how might other asset classes be affected?

The US Dollar might not be as strong as it was for much of 2018. Last year’s strength was all due to a steadily rising US interest rate regime.

Gold does not do well in a rising interest rate environment (as gold pays no interest or other obvious means of investment return) so when rates are high, the opportunity cost of owning gold is also high.In a more friendly 2019 interest rate environment, gold might continue to do well. At $1,300 dollar per ounce, gold has been strong over the last few months.It is viewed as a ‘safe haven’ investment as stocks have sold off.


S&P 500: 2639

Nasdaq: 7032

FTSE 100: 6900

Bonds – 10 Year Government Yields

US 2.70%

EU 0.20% 

GB 1.16%

Foreign Exchange 

EUR/USD  1.1400 (1 euro buys 1.1400 dollars)

GBP/USD  1.3000 (1 pound buys 1.3000 dollars)


OIL: Brent: 60.00 (dollars per barrel)

GOLD: 1300 (dollars per ounce)

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