Global equity markets continue to swing between gains and losses as we head into the important 2 day US
Federal Reserve Meeting which will conclude on Wednesday (Thursday morning Australia/NZ time). In
today’s daily we discuss our view on the equity market implications of a rate hike and the case for QBE
Insurance, a company we believe will be one of the few direct beneficiaries of Fed policy tightening.
At The Minute insights
QBE Banking on the Fed
Why We Believe the Fed Will Hike
We believe there is a high probability that the US Federal Reserve will raise rates this week given a recent string of solid US economic data releases including jobless claims, inflation figures, and measures of manufacturing. Furthermore, markets have largely brushed off the recent concerns over global growth
which the Fed had highlighted as its major reason for delaying an interest rate hike earlier in the year. The
Federal Reserve’s Chair Janet Yellen along with other key board member have also reiterated on several
occasions that they anticipate to raise interest rates in 2015. This week’s meeting is the final opportunity
this year to adjust monetary policy. The fact that the Fed have explicitly said they anticipate the Federal
Fund rate to move higher in 2015, we believe is priming the market for the move by allowing the market to prepare and position for a move.
Equity Markets
Stock markets appear to be comfortable with interest rates finally increasing in the US. The equity market
reaction to strong US jobs data earlier this month demonstrated this as markets saw this as a positive
development. The strong economic number is a reflection that the US economy is doing reasonably well
and markets reacted positively to the good news. Previously there was a concern that an interest rate hike
could spark a collapse in equity markets, but this no long appears to be the consensus view.
Portfolio Positioning
While we do not believe a gradual rate hike path by the Fed will be negative for equities, there are a few
Australasian stocks which should benefit from higher US interest rates. As highlighted in today’s chart of
the moment, we believe QBE Insurance is one of the handful of investment cases which should see share
price gains on the back of higher US interest rates. A large proportion QBE’s investments are held in short
term money or cash, so any increases in cash rates translate into greater investment return for QBE. As a
result QBE will be one of the few direct beneficiaries of Fed tightening in our view.
AUD & NZD
Should the Fed elect to hike interest rates this week, the AUD and NZD should reverberate this change in
policy rates by declining against the USD. A change in the US policy rate means that the interest rate
differential between AU/NZ and the US is now relatively more attractive in favour of US dollars.
Consequently, people will demand more USD increasing its value relative to the AUD and NZD.
ultimately believe that as the US gradually hikes interest rates and rates in AU and NZ remain low, that
the AUD could approach 0.70 and the NZD 0.60.
Chart of the Moment
Five Things Markets Will be Watching this Week
1) The highly anticipated 2 day US Federal Reserve Meeting will conclude on Wednesday, we expect
the Fed raise interest rates for the first time in 8 years (Thursday morning Australia/NZ time).
2) In NZ, quarterly GDP figures are due to be released on Thursday which will provide insights into
the health of the NZ economy. The consensus is for annualised GDP growth of 2.30%.
3) Important European inflation and manufacturing data will be released on Wednesday and should
help provide the European Central bank with more direction as to its easing policies.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) More generally whether markets globally can reverse last week’s declines.