Stock markets gain in contrast with hawkish Fed

Asian stock markets mainly posted gains on Friday regardless of Fed’s hawkish comments for a tighter monetary policy. Many investors believe that the Federal Reserve (Fed) might keep interest rates unchanged during next month’s monetary policy meeting, while analysts also give less than one third probability of a rate hike.

There has to be consideration as to whether U.S. policymakers are honestly paving the way towards an interest rate increase, or whether the hawkish comments made by the Federal Open Market Committee (FOMC) within Wednesday’s minutes was a charade. Although global economic conditions are not ideal and that it might be not beneficial for the U.S. economy in case the dollar appreciates as a result of it, the Fed wants reassure the markets that there is still consideration of a rate hike.

But it remains to be seen whether the possibility of increasing interest rates would hurt stock market participants. Arguably, equity markets already absorbed the negative effects of the Fed’s future monetary policy tightening plans over the following months and that could explain their reaction on Fed’s data last week. Nevertheless, that can easily change depending on the number of times the interest rate will be increased during the remainder of the year, and also depending on whether financial conditions will allow for that to happen.

The Japanese Nikkei 225 Index on Friday soared by 0.8% to 16,744 on Friday, while on the same day the yen remained relatively stable against the U.S. dollar with a marginal increase by just 0.2%. Hong Kong’s Hang Seng Index moved upwards by 1.4% and reached 19,863 and erased the pervious two days’ losses. The Shanghai Composite Index, that includes a portfolio of 50 large Chinese corporations, increased by 0.9% to an almost two-week high. Australia’s ASX 200 on Friday has not managed to erase the previous day’s losses but ended up by 0.4% to 5,355.5 on the back of increases of energy and materials prices.

In addition to the FOMC minutes, U.S. policymakers gave their views on the likelihood of a June interest rate increase. New York’s Fed President William Dudley expressed his satisfaction that now more participants are expecting an increase of interest rates during either June or July monetary policy meetings. And given that he is regarded as one of Fed’s particularly dovish members, his expectation of an upcoming rate hike might push a number of investors to adjust their positions. Moreover, Richmond Fed President Jeffrey Lacker said that he is relaxed over the possibility of four interest rate increases during this year.

The EUR/USD reacted to the FOMC minutes on Wednesday with a 0.8% decrease to 1.12188, the lowest level since the end of March. The decision to raise interest rates always depends on the U.S. employment market and inflation levels, but it might also be in the hands of UK’s citizens who will vote in June whether they wish to exit the European Union. It is therefore not advisable to be certain of a rate hike in June because even if the economy moves in favour of it, there is also the Brexit that could upset the markets.

https://www.theguardian.com/business/live/2016/may/19/markets-us-rate-hike-uk-retail-sales-live?page=with:block-573d5217e4b0451a6f4827b5#block-573d5217e4b0451a6f4827b5

http://www.fxstreet.com/analysis/fed-surprises-markets-with-hawkish-speakers-minutes-201605201420

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