What the US Federal Reserve decision means for investors

In a much-anticipated and much-debated decision, the US Federal Reserve has left interest rates at zero on 18 September 2015. They made this decision in spite of a stronger US economy and job market, expressing fears that the Chinese economic slow-down will have a knock-on effect on the US economy.

Barclays Investment Bank analysts who had previously predicted the Fed would raise rates to 0.25%, have now recalculated this expectation to happen in March 2016. This raise would have been the first one since 2006, with the rate having remained at 0% since December 2008.

Global markets have been nervously and eagerly awaiting this decision, and CANSTAR took a look at the situation locally and internationally, both before and after the decision.

How the Australian market trended ahead of the decision

The sharemarket in Australia initially looked set to open lower in anticipation of the decision, down 15 points. However, the market then surged on the day before the decision, as local investors followed the lead of optimistic offshore investors.

  • Energy stocks in particular improved by 3.02%. Crude oil prices rose because of a US petroleum supply report showing lower oil supply and production levels. BHP Billiton did particularly well, with stock rising 2.84%. Rio Tinto stock rose 1.75%.
  • The benchmark S&P and ASX 200 rose 1.57% and the All Ordinaries rose 1.50%.
  • Materials stocks rose 2.08%.
  • Financials rose 1.57%.
  • Consumer staples rose 1.34%.
  • Gold rose by 1.30%.

CMC chief market strategist Michael McCarthy says there is currently a lot going for Australian stocks, from rising share and commodities prices to the rising Australian dollar.

How global markets trended ahead of the decision

The uncertainty over the US rates decision created a period of volatility in global markets for weeks leading up to the announcement. This eased towards September 15, as the majority of economists and investors became confident that the Fed wasn’t going to raise rates after all. In the week of the decision, only 46% of economists surveyed by The Wall Street Journal were still expecting a raise, compared with 82% in August.

  • Oil: Brent crude oil fell 3.70%.
  • Gold: The Australian reported on September 14 that the price of gold had fallen to a one-month low, heading for its third weekly loss in a row, during the period of pre-decision uncertainty. Prices were down by nearly 2.00% in that week, at their weakest levels since August 11 at USD $1,098.35 per ounce. However, on September 15, gold made a small comeback, rising by 0.40%.
  • USA stocks: US stocks fell due to the impending interest rate decision and a new sell-off in China. The Dow Jones Industrial Average and the S&P 500 both fell 0.40%, and the Nasdaq fell 0.30%.
  • European stocks: European stocks mostly dropped, with investors remaining cautious ahead of the decision. Britain’s benchmark FTSE 100 index fell 0.5%, the Stoxx Europe 600 closed 0.60% lower, and the CAC 40 in Paris fell 0.70%. Germany’s DAX was an exception, closing a modest 0.10% higher. The euro was down 0.20% against the US dollar.
  • Chinese stocks: Chinese stocks continued to fall in the light of two economic reports released in mid-September. The Shanghai Composite Index closed 2.70% lower in the days before the US Fed decision. However, some analysts say Beijing may be able to prop up the market, since Shanghai’s largest 50 stocks showed a raise of 1.50%.
  • Hong Kong stocks: Hong Kong’s Hang Seng rose 0.30%.
  • Japanese stocks: Japan’s Nikkei fell 1.60%.

Post-decision: How we’ve reacted

Globally, stocks appear to have stabilised. Australian and Chinese stocks continue to fall, but slower.

  • The Australian dollar: After the decision, our dollar briefly shot up to a four-week high of 72.6 cents, before dropping further below its pre-decision levels, to 71.67 cents. * Australian stocks: According to the SBS, the Australian sharemarket has fallen 1.70% since the US Federal Reserve’s decision.
  • Oil: Oil prices sank, probably because the decision shows the US Federal Reserve still has doubts about the strength of the global economy.
  • European stocks: Britain’s benchmark FTSE 100 index recovered, rising 2.47%. The Paris CAC 40 rose 3.07%. Deutsche Bank has revised its timeline for raising its own rates, moving from September to October. Several prominent economists had advised that stress global markets were currently too volatile for such a move this month.
  • Chinese stocks: The Shanghai Composite Index has continued to fall, by 1.60%.
  • Hong Kong stocks: Hong Kong’s Hang Seng rose 0.43%.
  • Japanese stocks: Tokyo stocks rose 1.76%.

Why can’t US rates stay at zero forever? As CommSec economist Craig James told The Sydney Morning Herald, “The Fed policymakers must answer a simple question: ‘Has the economy recovered sufficiently so that interest rates can now be lifted from emergency levels?’”

He added, “The US central bank clearly doesn’t want to repeat the mistakes made by other central banks, when rates were lifted too early in the economic recovery process. But it also doesn’t want to wait too long before lifting rates and risk an outbreak of inflation.”

When rates do rise: What to expect

Ultimately, once interest rates start to “normalise” in the US, there will be better returns available for investors in US assets.

There’s a saying that’s been doing the rounds again recently: “When the US sneezes, the world catches a cold.” Investors here in Australia might expect a small, short-term ripple effect to their investments when the Fed does eventually raise rates.

Vanguard Australia told the SMH investors can expect the following when US rates do rise:

  • Bonds: Investments in US bonds would go up in value. Yields would vary from country to country.
  • Cash: No great change. Even if the Fed raises US rates, our own RBA is more likely to cut rates further than to raise them in the current climate.
  • Shares: The market volatility might settle after a rise – rather than becoming more volatile – because a raise would be proof that the US economy is recovering. Shares likely to do well after a raise are industries that benefit from a lower dollar, such as tourism, education, financial services and exports.
  • The Australian dollar: As US rates rise, the Australian dollar can be expected to fall, and we’re already at a 6-year low. Some analysts say we could be looking at a 60c dollar when US rates rise.
  • Property: When the Australian dollar goes down, the property market sees more overseas investors coming in.

The RBA has given an encouragement to investors to stay confident in the Australian economy. Our economy has a proven ability to cope with shocks. Deputy RBA Governor Philip Lowe says our economy has responded positively to both a commodities boom and the current falling commodities prices.

 

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