In this week’s Business Middle East we take a look at global markets’ performance ahead of the US interest rate decision.
With the countdown underway to the keenly awaited federal reserve bank meeting, tension is mounting in global and MENA markets, stirring currencies, commodities and stocks.
Since the start of this year, Fed chair Janet Yellen’s been promising a rate hike, however the decision has been postponed several times which significantly affects markets. Now with hours to go before the decision, which could be a turning point for global markets, many questions have been raised about the Fed’s options
To analyse what’s been happening, Daleen Hassan spoke with Nour Eldeen Al-Hammoury, chief market strategist at ADS securities .
euronews: There has been a decline in the dollar against most of the global basket of currencies, except the yuan. What are the implications of a low yuan now ?
Nour Eldeen Al-Hammoury: “A decline of the yuan might be an indirect message to the Federal Reserve not to raise rates this week. China may start devaluing its currency faster than before in order to increase its goods competitiveness to support its trade balance surplus which eased notably recently.
“Moreover, I would like to point out here that the Japanese Yen which we kept on mentioning in the past few weeks, remains a safe haven investment and the USD/JPY declined sharply to a level of almost 120 and we are still favoring such currency.”
Daleen Hassan, euronews: Last week, oil dropped sharply, as well as stock markets, how will the Fed’s meeting affect commodities and stocks?
Nour Eldeen Al-Hammoury : “As we noticed throughout the year, when the Federal Reserve meeting approaches, the market starts to decline sharply as the estimates were higher for a rate hike in every meeting. In return, global markets tumble including stocks and commodities. We saw how oil declined sharply side by side with equities and even the US dollar declined. This is a sign that traders might be liquidating their positions and staying away from the market ahead of the Federal Reserve’s uncertain decision.”
euronews: A wave of decline also dominated the stock market in the Middle East, of course, here oil plays an important role, are there other factors?
Nour Eldeen Al-Hammoury: “One of the reasons of course is Oil. Brent Crude closed below 40$ for the first time in years, moreover, the news about imposing VAT taxes in the region had a notable impact on equities. Declining global equities which also weighed on MENA equities across the board in addition to the fears from the Federal Reserve potential rate hike this week.”
euronews: Based on the US economic figures, what are the options for the Fed interest rate, What do you expect?
Nour Eldeen Al-Hammoury:”Well,we have three scenarios for this decision .
The first one is to raise the Fed Fund Rate by 25 basis points with a dovish tone about future hikes, for example, the Fed might say that they will wait for a considerable time to see the impact of the first rate hike before considering raising or even cutting rates again. This is the most probable scenario for us, which wont help the US Dollar even if they raised the rate.
“The second scenario is to keep the current policy on hold and to delay the rate hike again. However, this will hit the Federal Reserve’s credibility. Therefore, we think that the Fed will try to avoid it. The third scenario, which we think unlikely, is that the Fed may raise rates with a hawkish tone, which will lead to a spike in US dollars across the board. However, the Federal Reserve does not wants a strong Dollar.”
Under pressureThere has been a ton of pressure on currency markets pending the Fed’s decision. Over the past two weeks, concerns over market volatility caused the US dollar to drop around 3 percent against the international currency basket.
Last week against the dollar, the yuan fell to its lowest level in four and a half years, losing 1.8 percent of its value following comments by the People’s Bank of China.
European stocks declined to their lowest level in about two months.
Germany’s DAX lost 8.24 while Britain’s FTSE slipped 6 percent.
In the US, Wall Street ended the week in the red.
Commodities feel the crunch
Crude oil prices sank to their lowest level for seven years. Brent crude dropped by more than five percent and WTI by 2.8 percent.
There were similar slides in the Middle East where stocks plummeted too. Since the start of the month, the performance of the Arab markets has been spiraling downwards.
According to analysts, the decline in oil prices and the Federal Reserve’s pending decision are creating uncertainty among regional and international investors in MENA.