interest rate guessing game

By www.Prof i tableTrad ingTips .com

Interest Rate Guessing Game

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The US stock market is obsessed with when the US Federal Reserve will raise interest rates.




The interest rate guessing game may be more damaging to markets than an actual rate increase!




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The wall street journal writes that investors are wary of a rate increase.



http://www.wsj.com/articles/european-stocks-edge-higher-investors-cautious-ahead-of-fed-rates-meeting-1442304189


global stocks climbed tuesday as investors awaited a u.s. interest-rate decision later this week.




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.”




he said that one cause of the buying was likely investors covering short positions, or bets that stock prices will fall.




“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.”




Once the Fed raises rates the interest rate guessing game will be over.




So long as it postpones the decision markets will remain uncertain.




The Market Will Survive




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.



http://www.usatoday.com/story/money/markets/2015/09/14/wall-street-history-says-stocks-can-survive-fed-rate-hike/72071102/


[h]istory shows that stocks don’t go down in a straight line after the fed moves. stock performance is mixed.




in fact, the stock market has posted gains in all sorts of time periods following the fed’s so-called “lift-off” day.




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.




the biggest day 1 loss was in february 1994, when the benchmark stock index cratered 2.3%, according to data from birinyi associates.




in contrast, stocks jumped 2.3% after the first rate hike in january 1987 and 1.6% following the initial increase in june 1999.




The market may have already discounted the rate hike.




And, when the market sees rational behavior on the part of the Fed it may reward the action with a rally!




A Stronger Dollar




Many investors and traders are concerned that higher interest rates will drive the dollar higher making US exports more expensive and less competitive.




However, a stronger dollar coupled with weaker Chinese and European currencies will tend to drive foreign investment capital into the USA.




voa news reports on new Chinese US investment and compares it to that of other countries.



http://www.voanews.com/content/xi-us-visit-comes-amid-economic-slump-record-chinese-us-investment/2962760.html


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.




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.




britain accounted for $445.8 billion in 2014, while japan and the netherlands each hit more than $300 billion in investments.




five other nations exceeded $200 billion.




chinese investment puts it on par with countries such as finland, israel and denmark.




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.



interest rate guessing game

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