Rate rise anxiety returns, but fails to shock

4 November 2015

Had it not been for the penultimate US Fed central bank meeting, the past week could have been fairly uneventful. Markets began the week in a positive mood, still digesting the good news of a double rate cut from China the previous Friday. Then came the Fed announcement on Wednesday, which was far less dovish than the previous one in September and included wording which can be read as preparing markets for a December rate rise. So the recently subsided fear by stock markets of a US rate rise within 2015 was suddenly back on. Given the sharp sell-off in August and September was over exactly those rate rise fears one would be forgiven to have expected an abrupt end to the gradual stock market recovery. It did not happen. After an initial drop, markets turned and closed up on the day. Since then markets have been more sideways to slightly down, but we have certainly not seen a repeat of August and September volatility. What has changed in my mind is that for one the global growth scare of the late summer has passed as it has become clear that growth continues even if at a less dynamic pace. Secondly, the Fed's resolve to stick to their long broadcast message that they will raise rates only when economic stability requires it, may have become a beacon of hope for those who always believe the Fed officials know more than the markets and therefore suspect that the US economy may be doing even better than is already obvious. Whatever it is, the US central bank's strategy of gradually guiding towards the first rate rise in nearly a decade seems to be working. We are therefore hopeful that our assessment of last week that market sentiment may be turning from overly fearful to cautiously optimistic has gained some more evidence through the muted market action of the past week.