— This is the script of CNBC’s news report for China’s CCTV on June 14, 2018, Thursday.
Maybe you still remember that at the start of this year, the Fed expected that they will increase the interest rate for 3 times. But the Fed had already fulfilled their promised target till the meeting in June, and there will be 4 meetings this year, so, currently, the market thinks that the fed will be more hawkish as a whole and accelerate their speed of increasing interest rate. That is the market’s common sense. In the process of adjusting market pricing, US stock market was turbulent in the overnight. After the Fed announced to increase interest rate, US stock declined for a short time then buoyed, however, it finally closed down. Dow & Jones was off nearly 120 points, with a 0.47% decline; S&P 500 index decreased around 0.4% and NASDAQ composite index shed 0.11%.
From now to the end of this year, the Fed will launch the currency policy meeting on 1st Aug, 26th Sep, 8th Nov and 19th Dec. According to the Fed funds futures, the market thinks the percentages that the Fed increases interest rate in Sep and Dec are 79.2% and 57.1%. That means, the Fed may increase interest rate for 2 times before the end of this year, raising the range of the Fed funds rate to 2.25%-2.5%.
Therefore, such an expectation drives the exchange rate market experience turbulence: US dollar fell after a quick rise, while US treasury bonds have been sold out a lot, boosting the profit rate, but shed a little bit later.
[Sam Chandan, Dean, Schack Institute, NYU] “The feedback from the market right now was that, oh Fed perhaps is moving too aggressively and we are going to reflect that in the in the slope of the yield curve. I think whats unspoken at the Fed but perhaps the subtext to some of their language is at this point, it also concerns about the long jeopardy and needing to build up the dry power moving us to the neutral policy so they have room to maneuver when the economy does begin to slow again.”
The firmed greenback pressed some currencies in the emerging market again; we know that, some currencies in the emerging market, including Brazilian Real, Turkish Lira and South African Rand etc., has declined a lot because of the appreciation in greenback. And the stock market and the currency of these countries are under pressure again after the fed announced to increase interest rate.
Among them, iShares MSCI EFT, the funds that follows the whole emerging market, had a turbulent trend, once declined to 1.3%, hitting a low record in the mid-trading from 31st, May and closing down with 0.69%.
Ishares MSCI Brazil ETF that follows the Brazil stock market decreased to 2.9%, closing down around 0.23%.
At the same time, the one day loss for iShares MSCI Turkey ETF that follows the Turkey market once reached 4.7%, hitting a low record in the mid-trading from Jan last year and closing down 3.82%. Meanwhile, the outlook that the fed will increase interest rates also puts pressure on central banks in many regions.
After the fed announced its decision, we can see that the Saudi central bank and HK monetary authority said they will follow the fed, announcing that they will increase 25 basis points to hedge the pressure from depreciated local currency and buffer the fluidity condition. We will keep an eye on this issue.