Global Market Outlook December 2015: Getting comfortable with the Fed | BetaShares

Global Market Outlook December 2015: Getting comfortable with the Fed

BY David Bassanese | 7 December 2015

After some jitters in August and September, global markets appear to be getting comfortable with the prospect of Fed tightening by year-end. Global equities posted a further modest gain (in local currency or hedged terms) during November, after a solid gain in October. Australian equities underperformed, however, dragged down by the weakness in commodity prices and disappointment that the RBA did not cut interest rates as (briefly) expected by the market. Property stocks also took a tumble last month.


  1. David – I was interested to read in Antony Fensom’s Morningstar article of 7 Dec “Surviving volatile markets in 2016” that you said:

    “The other source of volatility in the market with the Fed rate rise is what happens with currencies … Until recently, most people thought the Fed raising rates would lead the US dollar to rise and the Australian dollar to fall, so everyone’s been pretty bullish on the US dollar. But if you look at history, in the last three Fed tightening cycles, the US dollar has actually weakened in the first few months post-hike.”

    This is counter-intuitive, with US bonds obviously becoming more attractive. Can you explain the reason for the previous US dollar decline after an increase in bond rates, and do you think it will happen again?


    1. David Bassanese  |  January 13, 2016

      Hi Bill

      Thanks for your comment. It turns out that if Fed rate rises lead to a rout in both bonds and/or equities it can lead to capital flight from the US by foreign investors. This is what happened in 1994. Yields are improving, but capital values are weakening. And if a rate rise is associated with inflation and a weakening economy it is not necessarily great for the USA investment case. I was surprised by these results also. Bottom line: if US rate rises are measured and still part of a growing economy (as seems the case now and a bit like 2004) than bull case for $US can still be made – after a possible nearer-term “buy the rumour sell the fact” sell-off immediately after the Fed starts raising rates.

Leave a Reply