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Fed is clearly entering unchartered territory – Deutsche Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 17, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) – Stefan Kreuzkamp, CIO at Deutsche Asset & Wealth Management, comments on the Fed’s rate increase.

    Key Quotes

    “The rate hike, together with dovish statements from the FOMC has been the basis of our 2016 market outlook. There is therefore nothing we have to change for our strategic calls: We remain constructive on developed market equities with a slight preference for Europe and Japan over the US. Our year-end targets are 2170 for the S&P 500, 11700 for the DAX, 3600 for the EuroStoxx 50 and 1030 for the MSCI Japan. Sector wise, technology, consumer cyclicals and financials remain in focus. The latter sector has historically outperformed as central bank interest rates start rising.”

    “We acknowledge the market risks associated with the Fed hike, for example fund flows out of higher risk asset classes such as US or emerging market high yield bonds. In light of the fundamental strength of most DM companies we would, however, view pronounced equity market weaknesses in the aftermath of the Fed hike as a tactical buying opportunity.”

    “With the first step being behind us, markets can now focus on the year 2016. We expect two further rate hikes, but Fed watching will become much more thrilling than in the past years. The Fed now controls two levers for its monetary policy: The federal funds rate and the speed by which it changes its policy of reinvesting proceeds from maturing bonds.”

    “However smooth this first hike will be digested by markets, the real test for the Fed comes in 2016. The Fed will continue to base its decisions on incoming economic data. Amidst the somewhat lackluster economic environment, investors will be left guessing at what FOMC meetings the next hike will be decided and when not.”

    “Investors may well have to learn to live with greater uncertainty about the path of monetary policy. Having squeezed volatility in recent years, at least the US monetary policy is likely to have the opposite effect in the months to come.”

    “The Fed is clearly entering unchartered territory as it has never embarked on a hiking path in an environment with such low growth rates and never with such a bloated balance sheet. The fact that reserve balances of financial institutions at the central bank have grown from 15 billion US Dollar in 2007 to now 2.5 trillion US Dollar makes the Fed’s task more difficult. We expect no shrinkage of the Fed’s balance sheet until after the first few rate hikes.”

    “With the Fed starting the tightening cycle shortly after the ECB has further eased its monetary policy underpins our bullish view on the USD which we believe to reach and even undershoot parity to the Euro in 2016.”

    “Based on our expectation of a very shallow rate hike path, we only see a moderate increase of US Treasury yields in 2016 but no sell-off in these papers.”
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