Market analysis by Junaid Wilson
The event global markets had been waiting for finally occurred. The Federal Reserve increased its fed funds interest rate range to 0.25% to 0.50% from zero to 0.25%. The discount rate was also raised by 25% points to 1.00%. The Fed also said that both the pace and magnitude of future rate increases will be data dependent — no change there. ‘Gradual’ became the new key word. The FOMC said that further increases would be gradual. The responses of the stock and bond markets to the Fed rate lift-off were entirely typical for the start of a rising interest rate cycle.
Equities rallied on the news as the Fed reinforced the view that the U.S. economy was growing. The U.S. dollar however was mixed and bond yields were up. The rate increase ‘celebration’ lasted one day, then investors were back to worrying about global growth and ever sinking commodity prices. Equities retreated giving back all or most of their Fed inspired gains.
In Europe- Despite losses on Monday and Friday, equities ended the week with healthy gains. Friday’s declines were attributed to profit taking after the mid-week rally and renewed concerns regarding global growth. Markets around the world were under pressure at the end of the trading week as investors remained focused on crude oil prices and the underlying weaknesses in the global economy. The FTSE and CAC were up 1.7%, the DAX gained 2.6% and the SMI added 1.3%.
On Thursday, investors had their first opportunity to react to Wednesday’s interest rate increase by the Federal Reserve. U.S. markets already had positively reacted mainly on Wednesday and Asian markets followed early in Thursday’s global market day. However, weakness in commodity prices and especially crude saw equity gains erode in late trading. An analyst noted that the Fed increased rates and the markets survived.
Two key business surveys were released for Germany during the week. Both indicated some weakness in sentiment. The UK posted three key reports for November — consumer prices, labour force data and retail sales. Consumer prices continued to display weakness while both the labour force and retail sales indicated strength.
Looking ahead- This week we have GDP release out of the UK and US that will be the main market movers.