interest rate guessing game
TRANSCRIPT
By www.Prof i tableTrad ingTips .com
Interest Rate Guessing Game
http://profitabletradingtips.com/profitable-trading-tips/interest-rate-guessing-game
The US stock market is obsessed with when the US Federal Reserve will raise interest rates.
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The interest rate guessing game may be more damaging to markets than an actual rate increase!
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Before We Continue…
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The wall street journal writes that investors are wary of a rate increase.
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global stocks climbed tuesday as investors awaited a u.s. interest-rate decision later this week.
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the rally “is a sign of risk reduction,” said jeffrey yu, head of single-stock derivatives trading at ubs ag. “there are a lot of uneasy investors.”
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he said that one cause of the buying was likely investors covering short positions, or bets that stock prices will fall.
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“there is a lot of uncertainty around the decision and for the large part the market is just willing the decision and that uncertainty to be over.”
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Once the Fed raises rates the interest rate guessing game will be over.
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So long as it postpones the decision markets will remain uncertain.
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The Market Will Survive
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usa today notes that a Fed rate hike need not be a bull market killer and that the market will survive a Fed rate hike.
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[h]istory shows that stocks don’t go down in a straight line after the fed moves. stock performance is mixed.
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in fact, the stock market has posted gains in all sorts of time periods following the fed’s so-called “lift-off” day.
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in the past six rate-hike cycles dating to 1983, the standard & poor’s 500 stock index declined on the day of the fed’s first rate increase three times, or 50% of the time.
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the biggest day 1 loss was in february 1994, when the benchmark stock index cratered 2.3%, according to data from birinyi associates.
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in contrast, stocks jumped 2.3% after the first rate hike in january 1987 and 1.6% following the initial increase in june 1999.
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The market may have already discounted the rate hike.
http://profitabletradingtips.com/profitable-trading-tips/interest-rate-guessing-game
And, when the market sees rational behavior on the part of the Fed it may reward the action with a rally!
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A Stronger Dollar
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Many investors and traders are concerned that higher interest rates will drive the dollar higher making US exports more expensive and less competitive.
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However, a stronger dollar coupled with weaker Chinese and European currencies will tend to drive foreign investment capital into the USA.
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voa news reports on new Chinese US investment and compares it to that of other countries.
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data from the u.s. commerce department’s bureau of economic analysis (bea) shows investment by chinese entities reached $9.5 billion last year, up from $3.3 billion in 2010 and just $385 million in 2002.
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china does not come close to being the biggest foreign investor in the u.s. last year, foreign investment totaled $2.9 trillion dollars, according to the bea.
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britain accounted for $445.8 billion in 2014, while japan and the netherlands each hit more than $300 billion in investments.
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five other nations exceeded $200 billion.
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chinese investment puts it on par with countries such as finland, israel and denmark.
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While many traders are worried about the interest rate guessing game others are interested in where the foreign money will go in the USA when the USD rises again.