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The United States Federal Reserve’s imminent increase in interest rates will likely calm the volatility in global markets.
This is according to Scott Thiel, deputy chief investment officer of fundamental fixed income at global asset manager BlackRock, who told a recent forum at the Gordon Institute of Business Science that “a rate hike will do a lot to release some of the tension and volatility in the market. I expect to see a positive stock market reaction and likely currency appreciation when rates are raised. The rand will be stronger the day the Fed raises rates.”
Thiel explained there was a 30% probability of a hike in US interest rates in September, or a 60% probability of a hike in December, in increments of 25 basis points.
Thiel said there was a confluence of factors causing the current financial market malaise, including a change in US economic fundamentals and the slowing of the Chinese economy coupled with the fall in commodity prices.
“Current volatility is an overreaction. There is a slow decrease in market intervention and financial markets will have to absorb that,” he said.
US monetary policy and normalisation of the global economy
The likely prospect of a hike in US interest rates would be the first step in a return to normalisation of the global economy. Policy decisions taken now will affect the economy in a year’s time.
“The world is waiting for policy normalisation to begin, which is adding to the current volatility,” Thiel said.
He said the Fed was waiting for signs of inflation to push them into monetary policy tightening and the central bank would not raise interest rates until they were absolutely sure they would not have to deviate from the decision.
“The Federal Reserve’s dual mandate of maximum employment and stable prices means the current US monetary policy of low interest rates is no longer appropriate given rising employment statistics,” Thiel said.
“The impact of a stronger labour market will drive the Fed to increase rates. We won’t get through this cycle without a hike.”
China slowdown and commodity price collapse
Thiel said the fall in global commodity prices and the slowdown of the Chinese economy was a reflection of the uncertainty of global growth.
“China is a gigantic economic presence and consumes massive amounts of the world’s iron ore. The relationship between Chinese economic growth and commodity prices is incredibly important,” Thiel said.
However, he said, the fall in Chinese economic growth to levels between 5.5% and 6.5% was not a hard landing.
“We must be very careful when trying to figure out the extent of the involvement of the Chinese government in the country’s economic affairs,” Thiel cautioned.
He said the surprise revaluation of the Chinese currency last month with reforms to bring the Yuan close to a free floating rate “was a great policy, executed at exactly the wrong time”, given the pre-existing volatility in the Chinese stock market and the fall in commodity prices.
The European economy and quantitative easing
The Bank of England would likely wait for a rise in US interest rates before following suit, Thiel said, but pointed out that the current low rates were unsuitable for the level of economic activity in the United Kingdom.
Europe’s policy of quantitative easing had been pervasive in terms of its impact on markets. The European economy’s response to a weaker euro and the lower oil price meant that the policy was expected to end in early 2016.
Thiel said it was impossible to tell yet whether quantitative easing had worked, but that there had been no alternative at the time: “If the world financial system had collapsed, there would have been no coming back.”
Quantitative easing had driven long-term interest rates lower, and “crushed inflation expectations and bond yields”, Thiel said.
However, he rejected the idea that the global economy would be in a low yield environment forever: “We won’t be like Japan, where the pervasiveness of government policy has crushed the country’s ability to get out of its own way.”
Investment opportunities in a volatile market
Despite the current market instability, there are investment opportunities in global financial markets. Thiel said he favoured emerging markets and felt the current volatility was an “overreaction.”
“Foreign exchange markets also present some remarkable investment opportunities as there is a dramatic overshoot in some currency depreciations. However, it depends on your risk appetite,” Thiel concluded.
» The Gordon Institute of Business Science forums are sponsored by City Press
