European Markets Rally in Anticipation of a Fed Rate Hike
European bourses have reacted positively ahead of an imminent Fed rate hike, as oil prices rebounded. The Federal Reserve Bank’s FOMC held a 2-day meeting on the 15/16 December to discuss the possibility of an interest-rate hike. This would be the first rate hike in the US in more than 9 years. The current interest-rate in the US is 0.25%, and there is a 75% likelihood among analysts that the Fed will raise interest rates by 25 basis points on Wednesday, 16 December 2015. European stock markets including the DAX, CAC 40 and the FTSE 100 have rallied in anticipation of the Fed rate type, owing to a rebound in oil prices.
Recall that the price of Brent crude oil and WTI crude oil took a pounding when OPEC decided not to reduce supply at its meeting on December 3, 2015. The global crude oil benchmark moved sharply lower, breaking through the critical $40 per barrel support level, prior to turning around in the run-up to the Fed decision. On Tuesday, 15 December, oil prices spiked from multi-year lows, as extreme volatility characterised commodities markets. The German DAX hit 10,370 (+2.3%), while the French CAC 40 index spiked to 4,572 (+2.2%). In the United Kingdom, the FTSE 100 index rallied to 5,976 (+1.8%) on the back of higher oil prices.
Why The Fed Matters to Europe?
The Federal Reserve Bank decision is exceptionally important for the global economy. For starters, the Fed is the world’s biggest monetary authority, ranking alongside the European Central Bank (ECB), and other major financial authorities such as the International Monetary Fund (IMF). A rate hike will increase the demand for the USD, which will have significant economic repercussions in terms of US companies’ export potential, and the price of global commodities (most are dollar-denominated). The ECB recently enacted policies to extend quantitative easing (asset purchases) for an additional 6 months at €60 billion per month. And the deposit rate was cut by a further 10-basis points to -0.30%. This was done to stabilize the European economy and to increase the inflation rate.
The Implications of a Fed Rate Hike
While the ECB measures were substantial they were less than what was expected by analysts and they resulted in a strong euro rally. Now it’s time for the Fed to move and this will likely help swing the momentum in favour of the USD. The EUR/USD exchange rate will weaken, making European exports more affordable to US companies while making US exports that much more expensive to Europeans. In any event, Fed rate hikes are imminent and most analysts expect the interest rate in the US to hit 1% by the end of 2016.