Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: James Strauss who wrote (23614)	8/23/1999 12:22:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

LONDON ANALYSTS: RELIEF RALLY SEEN ON 25 BPS/NEUTRAL FED HIKE By Sumeet Desai LONDON (MktNews) - A quarter-point hike in the Fed Funds rate without bias for future policy should still provoke a small 'relief' rally in both US Treasuries and equities, spilling over into the dollar and European markets, even though such a move is widely expected, according to market participants here. It is hard to find anyone expecting the Federal Market Open Committee to do other than raise the funds rate by 25 basis points to 5.25%, so markets the world over are focussing on whether the Fed will flavour such a move. They are likely to breathe easier if the Fed decided to let the rate hike do the talking and offer no hint of hawkishness in an accompanying statement. A "twenty-five basis points (hike) will be greeted with a sigh of relief in interest-rate markets," said Rob Hayward, an economist at BankAmerica in London. Market players said a 25 basis points hike with no statement -- at least one shorn of policy portent -- would almost certainly push up the prices of Treasuries and US stocks. The dollar should also be lifted by the higher US asset prices as well as receive a boost from an increase in interest-rate differentials. "We're expecting a 25 basis points hike but there are all sorts of rumours floating around they might do more," observed a FX trader at a US bank here. A quarter-point hike would therefore "be enough to push the market up," he commented. If the Fed were to accompany a quarter-point Fed funs hike with a statement of a tightening bias, or even a more nebulous expression of hawkishness, "You would see a sell-off in bonds and in the Dow," predicted Philip Shaw, chief economist at Investec. The market would then brace itself for further rate rises as it became increasingly skittish about the scale and scope for further monetary tightening, according to Shaw. Analysts said the jitters provoked by the announcement of a tightening bias or a hawkish statement are sure to be transmitted across the Atlantic. European stock and bond markets would take a hit alongside those in the US, although they would of course outperform their American counterparts. In Shaw's view, the outlook for the dollar would be slightly more difficult to predict than US stocks and bonds, although he thought the greenback would be more likely to take its initial lead from the direction of the Dow and Treasuries. Other analysts were more confident that the dollar would follow the movement of US stocks and bonds. "The dollar is going to see what the Dow is doing. If there is (a 25bps) hike with a tightening bias, we might see the dollar get a knee-jerk rise before taking a dive as stocks guys start selling," said the FX trader at the US bank already quoted above. In any outcome for Fed policy, analysts said the largest dollar moves were likely to be seen versus the Swiss franc. It's the "cleanest counter," said Chris Furness, senior currency stratgest at 4Cast, pointing to the slightly lower liquidity in this market compared with the euro. Looking beyond the initial market reaction to a Fed quarter-point hike accompanied by a hawkish presentation, players anticipated that a nerves-related slump in the Dow amounting to several hundred points could restore some life to the bond market within days. Such an effect on the Dow might also eventually lift European bonds if the resulting drop in European bourses made monetary tightening in the UK and/or Euroland less likely, or at least pushed it back. Another possible outcome at Tuesday's FOMC meeting -- that the Fed not only raises the funds rate but also the discount rate -- would be interpreted negatively by markets in much the same way as any hawkish signal in a statement, according to analysts here. The discount rate remained at 4.50% when the Fed raised rates a quarter point on June 30 to their current level. For Investec's Shaw, any discount rate hike would be enough to persuade the markets that more Fed rate rises were in the pipeline.