Complacent markets underestimate Fed rate hike

Added 8th September 2017

Complacent markets could be caught off-guard by a US rate hike and surprise political reform from president Donald Trump, the co-head of multi-asset at SYZ Asset Management has warned.

Complacent markets underestimate Fed rate hike

Hartwig Kos, a former member of the Barings multi-asset team, believes because the market’s expectation of both events happening is so low, even a small positive surprise from either could have an impact.

He said despite the Fed orchestrating interest rate hikes for a long time, the market is not expecting rates to rise any time soon and as such has not priced-in these changes.

In addition, over the last nine months the so-called Trump trade has washed away on the back of low expectation of the US president achieving anything politically.

“The bar is set so low,” he said. “[The market] is a bit complacent and that opens up the risk for an upside surprise regarding monetary policy.

“You have to bear in mind that financial conditions are even looser than they were in June and that creates the opportunity for the Fed actually to do something, or on the margin do a bit more than the market expects.”

Kos said a surprise from the Fed, Trump, or both, would see the rampaging euro move sideways.

“We are at the psychological level of 1.20 and I would not be surprised if the euro shifts sideways around that level before it sees a further appreciation in three to six months from here,” he said.

Kos said this has three implications from an investment perspective.

First, investors should be aware of duration because a Fed hike would end the recent bond rally which would drag the western government bonds to higher yields.

Second, it would revive the cyclical parts of the US equity universe. “Tech and defensive stocks have done well, but you might see cyclical stocks bounce back,” Kos said.

Finally, he said a pause in the upward trend of the euro could result in a further bounce in European equities.

Kos added: “[European equities] did well until the French election and have since been relatively underperforming because of the strength of the euro. If that goes away a bit, you might see a bit of a relief rally in European equities as a result of this sideways move.”

 

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Sebastian joined Last Word Media in 2017 as editor of Portfolio Adviser. He previously spent 10 years as a journalist and editor in the UK institutional investment sector, most recently as editor of Portfolio Institutional. Prior to that, he held several roles at Professional Pensions which is part of Incisive Media.

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