Rates Unchanged But Hawkish Stance Stiffened
After Fed Chair speech on 20 Sep 2023, stocks dipped in afternoon trading. All three major U.S. indexes were lower, with tech-heavy Nasdaq, losing 1.5%.
From the speech, market seem to gather that Fed is concerned about the potential for the economy to overheat. This is why Fed has signal a willingness to do so in the near future.
With possibility of one more interest rate hike this year. This is how market have reacted to this “hawkish” Fed response.
Oil slipped. Benchmark U.S. crude fell 1% to $90.28 a barrel after the speech on Wednesday afternoon.
This morning Nov 23 Futures drop by 0.71%
Bonds Become More Attractive: As yields on bonds rise, they become more appealing relative to other assets, such as stocks. This can lead to some investors shifting their money from stocks to bonds, which could put downward pressure on stock prices.
Yields Rise: US Fed leaves rates unchanged but sees tighter policy through 2024.
Treasury yields rebounded. The 2-year yield, which is particularly sensitive to the near-term path for rates, rose, settling at 5.189%.
Initial Decline: The stock market often responds negatively to hawkish signals from the Fed. Higher interest rates can increase borrowing costs for companies, which can lead to lower corporate profits and potentially lower stock prices in the short term.
Last night, we see the initial decline from the 3 indexes.
Sectoral Impact: Some sectors of the stock market, such as interest-rate-sensitive sectors like real estate and utilities, may be more adversely affected than others.
Conversely, sectors like financials, which benefit from higher interest rates, could see gains.
ETFs that I think should be able to provide a gain today (21 Sep 2023)
The SPDR S&P Insurance ETF, which invests in insurance shares. These financial names typically reinvest customer premiums in interest-bearing accounts. So, higher interest rates translate into improving profitability.
KIE started trading in November 2005. It has 56 holdings and follows the equal-weighted KBW Insurance Index.
The fund’s leading 10 stocks account for 22% of net assets. Such a diversified approach and the relatively low-risk nature of insurance stocks could make this ETF appealing for defensive investors.
Among the leading names on the roster are Globe Life (NYSE:GL), Progressive Corporation (NYSE:PGR), Unum Group (NYSE:UNM), Allstate Corporation (NYSE:ALL), and Assured Guaranty (NYSE:AGO).
As sub-segments, we see Property & Casualty Insurance (45.50%), Life & Health Insurance (25.68%), Insurance Brokers (12.61%), Reinsurance (9.68%), and Multi-Line Insurance (6.53%).
The VanEck Inflation Allocation ETF. It consists of other funds that offer exposure to inflation-fighting real assets, such as commodities, REITs, natural resources shares, infrastructure stocks, and master limited partnerships (MLPs). The ETF started trading in April 2018.
This fund currently has 24 holdings. The top ten ETFs in RAAX account for almost 80% of net assets of $34.3 million.
Among the leading funds on the roster are Invesco Optimum Yield Diversified Commodity Strategy ETF (NASDAQ:PDBC), VanEck Merk Gold Shares (NYSEARCA:OUNZ), Vanguard Real Estate ETF (NYSEARCA:VNQ), VanEck Energy Income ETF (NYSEARCA:EINC), and Global X US Infrastructure Development ETF (BATS:PAVE).
Investor Sentiment: Investor sentiment can play a significant role. If investors perceive the Fed's hawkish stance as necessary to combat inflation and ensure economic stability, the negative impact on stocks may be limited.
Stronger Currency: A hawkish Fed can attract foreign capital seeking higher yields, which can strengthen the U.S. dollar. A stronger dollar can negatively impact U.S. exports, making them more expensive for foreign buyers.
Pressure on Commodities: A stronger U.S. dollar can put downward pressure on commodity prices, as commodities are often priced in dollars. This can affect commodity-exporting countries and industries.
Consumer Spending and Borrowing
Higher Interest Costs: Consumers may face higher borrowing costs for mortgages, auto loans, and credit cards. This can lead to reduced spending in interest-sensitive sectors.
Impact on Emerging Markets
Capital Outflows: Higher U.S. interest rates can lead to capital outflows from emerging markets as investors seek better returns in the U.S. This can put pressure on the currencies and financial markets of these countries.
Even though Fed has decided to leave the rates unchanged but it is still at one of its highest but stiffened its hawkish stance, with another rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected.
It is important to note that the actual market reaction can be influenced by a variety of factors, including the magnitude of the interest rate hike, the Fed's communication strategy, and the overall economic and geopolitical environment.
Additionally, markets often anticipate and price in expected Fed actions, so sometimes the initial response to a hawkish signal may not be as pronounced as one might expect.
Traders and investors should closely monitor Fed statements and actions to make informed decisions in response to changes in monetary policy.
Appreciate if you could share your thoughts in the comment section whether you think these stocks I have mentioned would benefit from the latest Fed comments and response?
Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.
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