Tuesday, 23 August 2016

Markets mixed as Fed nears targets but still-low rates a risk

Markets were mixed on Monday.

The S&P 500 fell less than 0.1 percent but the STOXX Europe 600 rose 0.1 percent and the Nikkei 225 rose 0.3 percent.

US crude oil ended a seven-session winning streak to fall 3 percent.

Oil was weighed down by a stronger US dollar after Federal Reserve Vice Chairman Stanley Fischer said on Sunday that “we are close to our targets” and that he expected expect GDP growth to pick up in coming quarters.

That could signal a coming interest rate hike, especially after a Fed staff working paper published over the weeked showed that the Fed would have the scope to respond to an economic shock if the federal funds rate hits a still-low 3 percent in the coming years.

However, Steven Englander, global head of G10 FX strategy at Citigroup, warned in a note on Monday that this actually meant that the Fed would “have almost no ability to offset a shock in current circumstances” since the nominal Fed funds rate is currently at 0.5 percent.

Englander suggested that the paper is another argument to continue stimulating the US economy now so it's in a better shape to weather those futures shocks.

However, Allianz SE’s Mohamed El-Erian, who prefers structural reforms to improve the economy, told Bloomberg on Monday that low interest rates contribute to excessive risk taking and creates a “risk of financial instability down the road”.

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