Impact on EMEA markets
Likelihood that this week the US Federal Reserve to raise its key interest rate raises the question of how this would impact asset prices in world markets, writes the Financial Times.
In emerging markets, rising interest rates will increase the pressure on the local currency, which is already very strong. Although after previous crises governments of these countries have reduced their dependence on dollar-denominated debt, it can not be said for the corporate sector. The effect of rising interest rates will be felt mostly in developing countries with high current account deficits, such as Brazil. While the increase can be seen as a deflationary factor, it would probably weigh on the prices of assets such as gold.
Before credit markets, however, there are other dangers associated with less flexibility compared to stock trading. Purchase and sale of bonds go through a dealer, in most cases the bank. In the years after the financial crisis, however, banks came under regulatory pressure to dramatically reduce capital, which dealers they can invest in bonds and credit instruments. While low interest rates have stimulated a record debt issuance by companies that use so raised funds to buy back shares or transactions.
This creates situations in which there are many sellers and fewer buyers for bonds, causing prices to fall. Except in the last few weeks this episode markets had last October. If the credit market freeze, it will collapse and shares, as happened in 2008. How exactly will react to credit markets, higher interest rates, however, will be seen only after their promotion. That is why markets are betting that the Fed will not yet understand the risks, notes FT.