The Phaserl


Markets bracing for Fed rate hike impact

by James Corbett, The International Forecaster:

The great funny money QE dollar bomb is coming home to roost. US Treasury data shows that of the $750 billion dollars of hot-off-the-press QE play money that flowed out of the US and into speculative emerging economy markets from 2009 to 2014, about $230 billion of that came back in the period from July 2014 to September 2015. That inflow of dollars has likely accelerated since then.

What’s the big idea here? Two words: rate hike. It’s no coincidence that it was mid-2014 that the Fed first started hinting at a coming rate hike and that’s when the dollars started coming home.

The markets have been prepping for the Fed to call in the bets of all the people who have been speculating with cheap US dollars in higher return emerging market investments. Now this unwind is undoing alot of emerging market gains over the past several years with emerging markets struggling with the one-two punch of the looming Fed rate hike and yet more turmoil in the Chinese markets.

The rate hike is also haunting commodities, which have been inflated by speculation from hedge funds and mutual funds that were driven into the commodities markets in a search for return in a low-rate environment. Now that trade is unwinding and helping (along with the Chinese slowdown) to crash the global commodities index to its lowest level in 13 years.

As the dollars come home, the dollar index climbs. Although the rise of the dollar this year has not been unbroken, the trend since mid 2014 (when the index hhovered around 80.0) to today (around 98.5) is unmistakable. The big losers here are going to be those emerging economies that are holding the bag on US denominated debt or who have large borrowing needs. Commodity currencies like the Australian dollar and the South African rand stand to be pushed even lower.

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