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Hedge Funds and Their Stance on Emerging Markets

PART:
1 2 3 4 5 6 7 8
Part 7
Hedge Funds and Their Stance on Emerging Markets PART 7 OF 8

Does a Fed Rate Hike Indicate a Pullback in Emerging Economies?

Fed rate hikes

The Fed started its gradual rate hike process in December 2015. As of September 25, 2017, the Fed has increased its key interest rate four times. At the Fed’s Septemeber 2017 meeting, Fed chair Janet Yellen hinted that the Fed might start quantitative tightening in the near future. She was confident that the central bank’s steps will stimulate growth in the economy (SPY) (QQQ) (IWM) at a higher rate.

Does a Fed Rate Hike Indicate a Pullback in Emerging Economies?

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US (VFINX) inflation is improving gradually. On a monthly basis, it was 0.40% in August 2017. On a yearly basis, it was 1.9% that month. The higher inflation figure and a stronger labor market are signaling that consumer spending is gradually improving. It could be helping the Fed continue its gradual rate hike process.

Recently, since September 8, 2017, the dollar index (UUP) is moving in an upward direction. The Fed’s proposed quantitative tightening is mainly driving the dollar index. However, the dollar index showed a gradual fall in performance between January 3, 2017, and September 7, 2017.

Emerging markets

The stronger dollar (UUP) has always been a threat to emerging markets (EEM). The dollar has shown a negative correlation with emerging markets. Mark Jolley of CCB International Securities said in an interview with CNBC on Tuesday, September 19, 2017, that the Fed’s recent statement on quantitative tightening and a strengthening dollar index could lead to a pullback in emerging markets.

In the next part of this series, we’ll analyze Marc Faber’s view on emerging markets, particularly China.

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