Da da da daaa daaa, d-d-d daaa daaa d-d-d daaa daaa d-d-d daaa!
Been one month since the Fed raised rates it has, yes, hmmm?
Yep, it has. And although it hasn’t been what might be described as an outright currency war, the past month has definitely seen a disturbance in the force, writes Peter Wells in Hong Kong.
We’ve created some charts to show how the calendar month after the first rate rise in the US central bank’s current tightening cycle, commenced on December 16, played out for key global currencies and stock markets. And we’ve compared that to the start of the Fed’s previous tightening cycle, which began on June 30, 2004 when Emperor Greenspan lifted rates 0.25 percentage points to 1.25 per cent.
For major equities benchmarks, the month-after response has leaned more heavily toward the dark side this time around i.e. fallen more. But is that the Fed’s fault? Perhaps not.
The so-called Santa Rally actually kicked in following the Federal Open Market Committee’s policy meeting. Probably because the most well-telegraphed rate rise in history was finally out of the way, people prepared for it and could now get on with their lives.
But 2016 has brought with it a renewed focus on China. The renminbi commenced a sizeable (in its terms) depreciation right after Christmas, and heightened volatility in mainland equity markets at the start of January damaged sentiment. As a result, global financial markets had arguably their worst start to a year on record.
A relative stabilisation in the renminbi during the second week of the year has done little to quell concerns, with the market also unsettled by volatile – and declining – oil prices.
In 2004, shares were weaker coming into the Fed’s rate rise and were also weaker in the aftermath. But by the end of the month, they were starting to recover. It could take a bit longer before markets shake off this year’s malaise.
Currencies, though, have been a bit more haphazard. The range of performance this time compared to 2004 is much wider.
The US dollar has been a winner, naturally, in both instances, but by a little less during the start of this new, policy tightening cycle.
Worth noting, though, is that in 2004 the greenback was in the middle of a seven-year bear market, that saw the dollar index fall to a record low of 71.329 in April 2008 from a 15-year high of 120.9 in mid-2001. This time, and notwithstanding concerns about the effect of its strength on the US economy, the dollar is seen as being in an upswing.
Also noteworthy is the yen, which has strengthened since last month’s rate rise, as market jitters push investors shift toward haven assets. In 2004, the yen was the weakest of the major currencies we looked at.
The Australian dollar, the British pound and Asian currencies in general, have been hurt more this time around than in 2004. The renminbi is suffering more now for the simple reason it was still hard-pegged to the US dollar in 2004.
In general, the Fed’s December rate rise drew a much stronger immediate response from currencies and stocks than the June 2004 move did. And that’s despite how well-flagged the move was.
Volatility, measured by the Vix, was higher when the Fed pushed the button in December (17.86 versus 14.34 in 2004) and also in the month after (27.02 on Friday versus 15.32 in 2004).
It’s still early days in terms of how the most recent rate rise will play out, and the slumping oil price and disappointing US economic data are prompting markets to push back expectations for the next rate rise.
A stronger dollar may put the brakes on US economic growth this year. Measured by the dollar index, the US currency is about 12 per cent stronger than it was in mid-2004 when that other first rate rise took place.
The greenback and the yen may remain strong as uncertainty encourages investors to hug haven assets, which would likely complicate matters for the central banks of both countries. And who knows what’s going on with the renminbi: markets don’t seem convinced even the People’s Bank of China knows what it’s doing, to almost everyone’s detriment.
Investors are probably in for many more weeks of nervousness. In which case, May the force be with you; you’re going to need all the help you can get.