As global investors gird themselves for volatility in the wake on this week’s announcement by the Federal Reserve, no segment of the financial markets appear as vulnerable to a U.S. rate hike as the emerging economies. With a steep decline versus the U.S. dollar in currencies ranging from the Brazilian real to the Turkish lira, the prospect of a further decline spurred by rising rates in the U.S. is a particular concern for emerging economies. Across the developing world, the private sector amassed trillions in dollar-denominated debt that appeared manageable when commodity prices remained high and the Fed’s easing program weighed on the greenback. Now those days are gone. Adding to the gloom was a report issued by the Bank for International Settlements over the weekend that outlined concerns over the banking systems of the developing world, as high debt levels and slowing growth set the stage for a potentially painful unwind.
Banks settle swaps suit. Some of Wall Street’s largest banks reached a settlement at $1.87 billion on Friday to resolve claims brought against them by institutional investors over price manipulation in the market for credit default swaps. In addition to banks including Goldman Sachs Group, JPMorgan Chase, Citigroup and HSBC Holdings, both data provider Markit and the International Swaps and Derivatives Association were among the organizations involved in the settlement.
More signals of slowing growth from China. National Bureau of Statistics data released over the weekend indicated continued weakness in industrial sectors. Output for August rose by 6.1 percent year-over-year versus consensus forecasts with year-to-date activity expanding by 6.3 percent versus 8.5 percent at the same point in 2014. Meanwhile fixed-investment levels registered growth of 10.9 percent from levels in August 2014, the slowest pace since 2000. With sluggish signals continuing to arrive, analysts are increasingly focused on whether Beijing’s 7 percent annualized gross-domestic-product target for the year is now achievable.
Eurozone production levels jump. Eurostat data released on Monday revealed that industrial production grew more rapidly than expected in the common currency zone during July. Production levels expanded by 0.6 percent versus June versus consensus economist forecasts for 0.2 percent, with German specific levels reaching the fastest pace of expansion year-to-date.
Singapore election. In Singapore, incumbent Prime Minister Lee Hsien Loong secured victory in a national election on Friday with his People’s Action Party winning with a margin of nearly 70 percent of the vote. Lee has pledged to bring younger faces into his new cabinet as the nation grapples with a rapidly aging population and slowing regional growth.
Major merger announced in financial technology sector. Over the weekend, reports emerged indicating that San Francisco private equity firm Vista Equity Partners was approaching an agreement to acquire financial software firm Solera Holdings, based in Westlake, Texas, in a transaction worth over $6 billion including debt. Solera had announced last month that it had retained merger advisors as it sought strategic options.
Portfolio Perspective: Equity Investors Fear of the Fed is Misplaced
To our way of thinking, this focus on the Fed is completely and totally misplaced. Though it might not have been obvious in 2010, it should be clear today that this historic bull market in stocks was not solely the result of Fed action and support. (There will always be misguided cynics who insist otherwise, but this is now clearly a minority position.) There is plenty of historical precedent for stocks going up in a rising rate environment; there is simply no reason to assume that higher rates will “kill the stock market” or any such nonsense.
However, even though the focus is wrong, it is real and we must respect the psychological implications; be clear that we are separating the actual importance of the timing of the Fed’s decision (not important) from the market’s perception of that importance, and the perception is perhaps the most important aspect of market psychology today. We believe that the uncertainty, constant speculation and discussion, and fear-mongering have created an environment in which Fed action could be a strong catalyst for a stock market rally. Insert your favorite trite saying here (“the devil you know...”), but some resolution, any resolution, will bring an end to the speculation.
Adam Grimes is the managing partner and chief investment officer of Pittsford, New York-based research and asset management firm Waverly Advisors.