By: Arif Habib Limited
Market Strategy: US Fed finally raised its key interest rate by 0.25%, after almost a decade. The highly anticipated Fed Funds Rate hike finally came through as the Board of Governors of the Federal Reserve System voted unanimously in favor of raising its key interest rate by a ‘soft’ 0.25%. The decision came as no surprise as the rate hike was imminent amidst moderate growth in the US economy for the last few months. A few key triggers for the rate hike were the robust improvement in housing sector and business fixed investment in the last few months, recent labor market indicators (including ongoing job gains, as well as declining unemployment; 5.0% in Nov’15 to 5.7% in Jan’15), and rise in inflation from -0.1% Jan’15 to +0.5% Nov’15. Yesterday’s rate hike marks the start of the US contractionary monetary policy with four more hikes to follow in CY16 (based on experts’ analysis), to bring the interest rate up to 1.25% – 1.50% range. While maintaining an accommodative stance on monetary policy, the Federal Reserve expects further improvement in US labor market and a target of 2% inflation. The next two Federal Open Market Committee meetings are scheduled for 29th Jan’16, and 19th Mar’16.
Commodities expected to weaken further, in the medium-to-long term Major commodities, such as oil and gold, are expected to witness further downward pressures in the medium to longer term, adding to their recent plunge. Oil, already trading at over a decade low, sunk another -2.4% DoD after the rate hike announcement, coupled with expectations of US lifting its 40 year ban on crude-oil exports in near future. Whereas gold, which serves as a hedge against equities posted a gain of 1.05% DoD. In the short term, given the rise in interest rate has been kept nominal at 0.25%, we may notice some volatility in commodity prices, however; in the medium term, as the Fed is expected to target up to 1.5% in CY16, with further hikes on the cards for coming years, commodity prices will probably decline.