BackFive charts to watch after the US Fed rate hike
Apart from the near-term reaction from equity markets, a number of other metrics will be tracked closely to gauge the health of the markets
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The US Federal Reserve’s decision on interest rates will play out across different asset markets in varied ways. Apart from the near-term reaction from equity markets, a number of other metrics will be tracked closely to gauge the health of the markets.
US treasury yields (two-year and 10-year)
While long-term yields in the US have remained largely steady in the run-up to the decision, short-term yields such as the two-year treasury yield have hardened noticeably from 0.6% in October to just under 1% now. If market volatility follows the Fed’s decision, long-term yields may stay in check as investors seek the safety of treasury, but short-term yields may continue to rise. The result will be a flatter yield curve.
Euro-dollar
Long dollar has been one of the favourite trade across markets. As anticipation of the Fed normalizing monetary policy has risen, the dollar has strengthened, particularly against the euro. In recent days, there has been some paring of positions. The Fed’s language on the future course of monetary policy will be key in determining whether the dollar resumes its two-year-long rally. A dovish statement could lead to unwinding of long positions.
Commodity prices
The dollar’s move will also have a bearing on commodity prices, which have, in recent months, made the markets extremely nervous. No longer is a fall in oil prices seen as positive and equity markets tend to track oil prices lower. A resumed dollar rally could be negative for commodities and in turn negative for equities.
US high-yield bonds
The latest wall of worry that markets are climbing is the sell-off in the junk bond market. Junk bond prices have fallen sharply and yields have soared. Fears of a rise in defaults from this segment, particularly from commodity-linked credits, have also risen. Indian junk bonds have also seen a spike in yields. A continued sell-off in this market could have implications for the broader markets. Analysts have also noted the widening divergence between the junk bond market and stock market, and raised concerns over that.
Emerging market currencies
Emerging market (EM) currencies are once again seen as vulnerable, although the basket of currencies at risk has changed from 2013 when EMs were hit by the taper-tantrum. Not only are a number of EM economies facing macroeconomic worries, high levels of corporate debt are also seen as a risk. Continued pressure on EM currencies, resulting from withdrawal of foreign investor positions, could destabilize broader markets.
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