Fed rate hike and the markets
The Fed’s decision had a limited impact on the S&P 500 (SPY), which closed last week at 2,433.2, a gain of 0.06% for the week. This rise isn’t the usual case when rates go up, as a higher cost of borrowing could impact margins of businesses and thus have a negative impact on stock prices.
Sectors that are adversely impacted by higher borrowing costs include automobiles (CARZ) and housing (ITB) where customers borrow to fund their purchases, and at the same time, financial (XLF) institutions stand to benefit from higher rates. With the US Fed signaling further tightening in the months ahead, it’s likely that the sectors that have rallied in the low-interest rate environment might take a breather. The question we need to answer is will this stop the S&P 500 from continuing to inch forward in a rising interest rate environment?
Speculator appetite for the S&P 500 on the rise
Net speculative long positions by large speculators on the S&P 500 Index have risen by 1,735 contracts in the previous week as per the Commitment of Traders (or COT) report released on June 16 with the trading positions as of June 13. Does this mean that investors don’t mind the interest rate hikes, or are they more focused on Trump’s proposed reforms, which seem to be further and further away?
What to watch out for next week
Barring housing data, there are no major economic data releases scheduled for this week. However, US market (ITOT) participants will observe a lineup of Fed speakers for some insight into whether rates could increase more.
In the next part of this series, we’ll analyze how the US dollar reacted to last week’s events.