Fed rate hike: How did global equities react?

In this week’s video update:

  • The U.S. Federal Reserve announces their first rate hike in more than eight years.
  • U.S. equities remain flat, while Eurozone and Japan equities rally.
  • Emerging markets take a hit on strength of the U.S. dollar.

This week, the Fed did the expected, but said the unexpected.

In this episode of Market Week in Review, Russell Investments Chief Investment Strategist Erik Ristuben was joined by Rob Cittadini, regional director, consultant relations, to discuss the consequences of the Fed rate hike.

A pinch of Fed hawkishness

According to Ristuben, this 25-basis-point increase was only the second Fed rate hike in more than eight years. The hike itself was very much expected. But the Fed’s comments implied that as many as three rate hikes may be possible in 2017. Russell Investments’ North American Strategist, Paul Eitelman called this, “a rate hike with a pinch of hawkishness.”

Russell Investments’ strategists still project only two rate hikes in the coming year. For more on our Fed announcement views, click here.

Equity markets respond

In response to the news, the 10-year Treasury yield moved up about nine basis points following the announcement. The dollar rallied significantly more. The U.S. Dollar Index was up about 1.3% for the week. Since the eve of the election, the dollar has appreciated in the U.S. Dollar Index by about 5%. The U.S. equity index was effectively flat this week, as measured by the S&P 500®.

The Fed news clearly had an impact in Europe, in Japan and in emerging markets. In the Eurozone, the Stoxx 600® index was up almost 1.5% week over week. In Japan, the Nikkei 225 index was up a little over 2% this week. According to Ristuben, this was also likely based on the strength of the dollar, which makes non-U.S. goods and services seem comparatively less expensive.

Emerging markets equities, according to Ristuben, “got slapped,” with the Russell Emerging Markets Index® down about 2% on the week. Russell Investments strategists do project the emerging markets sector to still have a solid 2017.

Market Week in Review will return Friday, January 6, 2017.