It wasn’t a big surprise for the financial markets to see the Federal Reserve hike the interest rate by 0.25% last week, and the stock market moved swiftly higher on the back of this announcement which has removed some uncertainty.
Source: propertyobserver.com.au
Now that all the suspense surrounding the Fed's rate hike is gone, and only questions about the future of risk assets and deflation remain in a "Policy Mistake" world, the market's attention is turning back to the disturbing topic which spread like wildfire two weeks ago when first Third Avenue, and then several more mutual and hedge funds announced they would liquidate while imposing redemption "gates."
Now that the Fed's rate hike is in the history books and Yellen is eager to demonstrate that the Fed is confident enough in the US economy by unleashing the first tightening cycle in nearly a decade, market participants are dramatically shifting their attention, from the rate hike as a bullish key catalyst in the "renormalization" timeline ("buy stocks" because the Fed wouldn't risk recession if it wasn't confident in the economy), to the actual consequences of the Fed's dramatically changed reaction function, which as we explained previously, was far more hawkish than the market initially
While it took the equity markets over 24 hours to wake up to the realization that the first Fed tightening in 9 years is actually just that, and that not only monetary conditions will progressively get more constrictive especially if the Fed is intent on 4 more hikes in 2016, but that P/E multiples will contract by at least 3% according to a still optimistic Goldman Sachs, something far more interesting happened in repo markets, where the consensus expectation was that the Fed's rate would be accompanied by a major liquidity drain via reverse repos.
5 Key Charts Show Rising Interest Rates Good For Gold Bullion
Gold fell to the lowest level in dollar terms since 2009 yesterday after the Fed’s “historic” 25 basis point interest rate rise on Wednesday. The rate hike has been heralded as the “end of cheap money.” This may or may not be the case but what is more important for precious metal buyers is the impact of potential rising rates on gold prices.