InvestmentsJun 23 2015

Grexit fears may delay US rate hike

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Grexit fears may delay US rate hike

The flare-up of the Greek crisis in the eurozone is leading to a state of uncertainty about when the US central bank is going to finally hike its interest rate, experts have cautioned.

The warnings came after the US Federal Reserve (Fed) last week adopted a more cautious tone towards the global economy, throwing into doubt rising certainty that it would begin raising the rate in September.

The Fed confirmed it would not increase its rates in June for another consecutive month.

Chairwoman Janet Yellen said even though the US had shown signs of rebounding from its lacklustre growth in the first quarter, where GDP shrank 0.7 per cent, the recovery had been slower than the central bank had hoped.

David Page, senior economist at Axa Investment Managers, said: “With the risk of a ‘messy’ Greek scenario unfolding during the summer, the risks are rising that the Fed’s decision to tighten policy could be delayed beyond September, to December.”

City Asset Management research director James Calder said: “I believe there is a 50/50 chance of the US hiking [its] rate in September, but it may not happen until December, or even January.”

Matthias Scheiber, multi-asset manager at Schroders, said US policymakers would look at the potentially damaging fallout from the Greece issue “in foreign exposure and market sentiment terms”.

“Its decision on when to raise the rate could be impacted by a Grexit [Greek exit from the eurozone]. Countries could negatively move together and we would see some volatility,” Mr Scheiber added.

Fears are rising that US growth, and an increase in its interest rate, could be pushed further off track if Greece leaves the eurozone bloc and contagion spreads.

In her statement last week, Ms Yellen acknowledged the stand-off in Greece could cause difficulties and there was the potential for “disruptions”.

However, Henderson Global Investors multi-asset manager James de Bunsen said that while he believed the Fed would be “keeping an eye on the situation”, he expected US policymakers to be “more interested in what happens to the dollar”.

Looking at the latest rhetoric from the US central bank, Hermes Investment Management’s head of multi-asset, Tommaso Mancuso, said the Fed had done “a fantastic job of keeping all options open”.

He said: “The Fed is still data dependent. I frankly believe they don’t know how they are going to play this one.”

Mr Mancuso’s view was supported by the central bank’s ‘dot plot’ chart, which sets out rate expectations. Last week’s dot plot showed committee members were divided over how many times there would be a rate hike this year, with five officials advocating only one move.

In a bid to placate markets, Ms Yellen again emphasised last week that any increase would be “gradual”. However, managers said this much-repeated word fell on deaf ears.

Mr Page said: “I think markets will overreact when the first rate hike occurs and this means the Fed will have to act to soothe this reaction.”

However, Paul Flood, manager of the Newton Multi-Asset Income funds, warned: “Historically, market participants have always underestimated the pace of interest rate rises once the cycle has begun, so one must be cautious and avoid having too much interest rate risk in portfolios.”

EM index rises after Fed statement

The news that the US Federal Reserve is becoming increasingly cautious about raising its base interest rate too soon has come as a relief to emerging market assets.

Equities and bonds from developing markets have sold off heavily in recent months, in part because a tightening of US monetary policy is seen as a negative for the region.

However, after Federal Reserve chairwoman Janet Yellen’s statement last week, the MSCI Emerging Markets index registered a small gain. But the index is still in technical correction territory, having fallen by more than 10 per cent since April.