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US Interest Rate Decision Looms - But Why?

US Interest Rate Decision Looms - But Why?
Sep 11, 2015 By Simon Herrmann

The US Federal Reserve will meet next Thursday and discuss whether to raise interest rates by 25 basis points or keep them once again on hold. Since the beginning of the year analysts, newspapers and investors have been speculating whether the FED will raise rates this year and next week could finally be the day. Or maybe not?

If newspapers have to come up with reasons why markets move and nothing happened in China or Greece, they usually refer to the looming US interest rate decision. Only a few short weeks ago the market had priced in a very high chance of a rate cut, but due to the recent turmoil in China and global equity selloff, the market now believes that the chances of a rate hike are considerably small.

The U.S. benchmark index S&P500 is still recovering from the August selloff that has sent U.S. stocks more than 10% lower, the first correction for U.S. stocks since the global financial crisis. The index is now starting to form higher lows and is testing the resistance at 2,000. From a technical point of view the formation of this ‘ascending triangle’ is generally considered to be a bullish sign, however it remains doubtful if technical indicators apply here. If it fails to break through the 2,000 level, then we could witness a break to the downside through the bottom trend line. It seems like the index is preparing itself for the showdown 

Even though volatility is still at levels well above the average, the market seems to think that U.S. stocks offer good value, which has pushed the index higher in the past few weeks.

Looking at the facts, the U.S. economy is in good shape and the unemployment rate has been decreasing steadily. Eventually the U.S. needs higher interest rates as money is too cheap. Nobody knows if the FED will raise the benchmark interest rate or if it does nothing. We also don’t know how the market will react and what impact it will have on the USD. Local investors should not be too concerned about next week’s move. The best advice one could give is to de-risk the portfolio ahead of the decision and just sit on the sideline. There’s no need to make any large stock purchases leading up to Thursday as the balance of risk remains elevated. As soon as we have clarity, we will assess the situation and make decisions accordingly. If you are holding fundamentally strong companies, then you should not be too worried about the daily volatility.

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Simon Herrmann Author: Simon Herrmann Sep 11, 2015

Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.

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