Saga of Financial Markets


Last updateSat, 29 Jul 2017 12am

Back You are here: Home Blog Blog Update On the Markets What if there is no rate hike?

What if there is no rate hike?

The latest Fed Funds futures - a place to bet on future moves in rates - suggested there the probability of rate hike is less than 50% even after the Fed meeting in March next year.  It was 99% certainty at the beginning of the year.

What would be the implication of prolonged zero rates and what would be the most appropriate asset allocation strategy?

If rates were to stay so low, that will mean deflation is spreading - a process that starts with the slowing economy in China, and falling prices for commodities.  We should continue underweight emerging countries especially those that are commodities driven economies because a deflationary environment would keep the downward pressure on commodity prices, and therefore maintain the down pressure on those economies.

For equities play such as S&P 500, a better play would be focusing on stocks that can show some sustained pricing power and on those that pay a decent yield.  This is because deflation will attack companies' revenues and their pricing power.  As such, if there would be a stock rally, it would not be an indiscriminate rally.

For bond play, in a deflationary environment, the most appropriate strategy is to buy long dated fixed income, as they are most sensitive to rises in interest rates.  However, if there would be any surprise hike in interest rate, these long dated bond would be hit hard.

What about the dollar?   Recent strong dollar was driven by a perceived disjunction between central banks; the Fed seemed likely to tighten policy while other big central banks were easing, and higher US rates would attract money to the US, driving a strong dollar.  As the Fed hold on to the rate hike, dollar will be weaken.


Financial Times, John Authers, 2015-10-16, "What if Rates Never Rise?"