Risk of correction looms as US Fed moves closer to tightening

Markets expect the Fed to reduce its monthly asset purchases by another US$10 billion and completely wind down its quantitative easing programme next month. 

Moreover, many economists expect the Fed’s monetary policy to turn more hawkish, reversing an accommodative stance widely believed to have fuelled stocks’ rally in recent years and paving the way for the first US interest-rate hike since 2006 next year.

Markets have reacted nervously. The US stock market saw choppy trading last week, logging a first weekly loss since early August. Yield on 10-year Treasuries shot above 2.6 per cent for the first time since early July. The dollar index soared to the highest level in 16 months. Emerging markets’ stocks, bonds and currencies are likely to be under selling pressure if the Fed hints at a tightening stance. 

As US economic data continue to improve, bond yields will rise and financial markets will have to adjust to the new rates. A rise in bond yields and a strong US dollar trajectory will attract money to the US bond market, causing a spike in volatility in stocks, bonds and commodities markets around the world. 

Looking beyond the correction, my bullish view on equity is still intact, as global economic conditions will remain on a growth path and provide support for corporate earnings. The coming pullback will only make stocks cheaper, and this could offer a great buying opportunity for those who missed the last leg of the rally.

 

Komsorn Prakobphol is a senior investment strategist at Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com or [email protected].