While many traders were on holiday during the summer, markets were not at ease with quite a few issues emerging, so far hitting only emerging markets. September may see a culmination of these adverse developments in what could turn into a perfect storm. The trouble may hit stocks quite hard and benefit the safe-haven US Dollar that also enjoys other advantages.
Here are five reasons to be gloomy:
1) Fed rate hikes
The Federal Reserve initially raised interest rates in December 2015, but these hikes began biting the global economy only recently. The lift-off from rock-bottom zero-bound rates took some time to reach other countries that became reliant on cheap funding in the trustworthy US Dollar.
Moreover, the pace of rate hikes has accelerated of late. There was only one raise in 2015, one in 2016, three in 2017 and four expected this year. Also, the change of guard at the helm of the Fed resulted in a more hawkish tone. Jerome Powell and the current voting members of the FOMC are more determined to battle inflation than Janet Yellen’s committee.
The increase in US rates makes the US Dollar more attractive, thus making the dollar-denominated debt payments dearer. Rising rates make recycling dollar loans more expensive as well. It also makes an investment in stocks less attractive.
Despite executing a gradual, predictable and well-telegraphed tightening cycle, the Fed’s moves are the root cause of the issues in Emerging Markets that also have an impact on developed economies that rely on EMs as the source of growth.
Another Fed rate hike in September is all but done. And signaling another move in December is also highly likely. More trouble in EM and making safer investments more attractive could weigh on stocks and push the greenback higher.
