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S&P Experts On Imminent Rate Hike: Buy Commodities; No Bonds
Aspire | 28 August 2015
By: Vance Wong
Articles (74) Profile

Ever since the Federal Open Committee Meeting (FOMC) minutes were released, economists and expert analysts have been discussing it. While there was no explicit indication that the US Federal Reserve would hike rates, there is a growing consensus that it will happen in September.

Undoubtedly, there are experts who think the current slowing of the global economy is making it hard for the Feds. Several Standard & Poor’s (S&P) Dow Jones Indices analysts had given their views about the rate hike and what it would mean for the economy.

Rates Not the Most Worrying

Weak consumer spending is considered a more long-standing concern. Image from: REUTERS/BRENDAN MCDERMID

Contrary to what most investors and market watchers are thinking, Dr. David Blitzer (Ph.D), managing director and chairman of the Index Committee thinks that the economy has worries bigger than interest rates.

Dr. Blitzer pointed out that the stock market has had a very long run, which elevated valuations to ‘generous’ levels despite weakening earnings growth. Consumer confidence and exports have weakened for some time now, and this is even before the rates are raised.

When rates are finally raised, we could expect weakened consumer spending and a stronger Dollar would hit exports and commodities even harder. These are issues that the Fed would find extremely challenging to tackle regardless of whether rates are raised or not.

Rates Least Important In Commodity Performance

Commodities Indices expert Jodie Gunzberg thinks that interest rates are actually of the least importance to commodity performance right now. The slowing of China’s economy, oil production in the US and supply in Iran, as well as the Greek crisis are all bigger factors in commodity performance.

She pointed out that even if rates were raised, it would be only about a 0.25 percent increase, a figure that the markets have probably already taken into account. A stronger Dollar would also not have much effect on commodities because of the existing glut, especially in oil.

Oil prices have already fallen to four-month low in July, amid Chinese stocks rout.

Problem in the Bonds Market

If there were only be one asset class that would be affected by hiked rates, it would most probably be bonds. James R. Rieger, Head of Fixed Income, reminds us that bond prices and interest rates would almost always have an inverse relationship.

Duration is everything for bonds in a climate where rates are rising. Bonds that have a longer maturity time are prone to decline in value as yields change. The current climate of fixed-rate bonds being favourable might change quickly, and this is when floating-rate bonds triumph.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

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