Who would have guessed that the American central bank the Fed is “surprisingly” keeping their interest rates without a change after the meeting. Even when it was a puzzle with its difficulty suitable for a trained monkey, many financiers and speculators had pretty difficult time with it past few days.
Proof of this is that after the news – that nothing will actually happen – was announced the stock markets in the USA and in Europe skyrocketed. If this news was obviously expected the stocks wouldn’t do anything because they would be mirroring this expectation in them already. That’s precisely the nitty-gritty of the situation: The financial markets are constantly making mistakes when the future steps of the Americans are concerned. (Just like my colleague Pikora, who always assumes that this time his bees surely won’t sting him so he doesn’t take his beekeepers veil again. Just so he can squint at me with only one eye next day.)
Except that this situation has very significant consequences not only for the American but basically for the entire global market. American interest rates are basically deciding the exchange rate of the dollar against the euro just like they are deciding the prices of stocks, oil or (not) moving giant sums of capital from developing markets to American actives. One rise of the American interest rates – and global finance world needs to look for new balance.
Let’s remind us what are we talking about here: Before the end of 2015 the American Fed more or less “symbolically” raised its interest rates, which it was keeping for a long seven years at basically zero. (Even this zero was in its time something unprecedented. Then the European central bank trumped the Fed by doing something even more unprecedented and came up with negative interest rates. In this light, looking back the zero American interest rates seem fairly conservative.) So at the end of 2015 it was generally believed that the American economy is recovering so quickly that the American interest rates will be during the year 2016 returning to long-term normal, which is somewhere around 3 %, fairly fast. Understood as they will rise several times in a row.
It didn’t seem that way to us. Since early 2016 we have been warning that it won’t be as swift and we were considered pretty extravagant for this opinion. The overwhelming majority of the financial market unshakably believed that the interest rates in the USA will rise at least 3x during the year 2016. Which didn’t happen? As the time passed this expectation was vanishing like a puff of smoke.
Do you know the saying: faith will heal you…On financial market, it’s twice as true. Speculators told themselves over and over again every month: “Oh well, the interest rates didn’t rise this time but next time they surely will!” That’s why the global finance market happens to be for about three-quarters of the year in a state where it believes that “higher interest rates are bound to tumble”. Even though the reality is telling us that the state of the American economy is not getting significantly better, on the other hand, new uncertainties are coming up: First the slowdown of China, then the uncertainty what to exactly expect in the case that Donald Trump wins the elections… In other words: The finance world is basically reacting to its own fiction and not to reality for about nine months now.
The Fed didn’t raise the interest rates this time but suggested that until the end of the year one raise might come. December is generally considered as the most likely date. “Most likely” doesn’t mean “sure”. Such indicating has been here many times before. What do I want to say? What could also happen is that the finance world is terribly wrong. And even thought it would be right about the interest rates rising in the USA at the end of the year, when will we get continuation? In another 12 months? Are they planning on raising the interest rates about a quarter of percentage point every year…? That is most likely not what the speculators are expecting.
All of this that I am describing here has one very, very, practical outcome. If I am not wrong and if the rising of the interest rates in the USA goes slower than the majority of the speculators thinks today (just like it has been in last nine months) then it means that the dollar is overvalued...
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