The threat to raise interest rates has been looming this year, as the U.S. economy gains health and the Federal Reserve remains optimistic about the future. In market openings this week, stocks have taken a hit, and investors should be cautious about what’s ahead.
The fact that rates are about to increase in the U.S. is not exactly news to anyone, but up until this point, there has only been speculation in regard to how stock markets would be impacted. We could now be seeing the real effects of higher interest rates, and it’s still likely that there are three more rate increases to come this year.
World Stock Markets Slide
Europe was hit heavy at the start of this week as the stock market dropped 1% on the MSCI index. The MCSI tracks 47 countries in Europe. Japan’s Nikkei was also down 1% on Monday, after making some gains last week on the news that President Trump would finally meet with North Korea’s leader for talks.
Even though US markets started on some days with gains last week, the total change across seven days was a drop of 1.57% on the Dow Jones, 1.04% on the S&P Index, and 1.27% on the NASDAQ.
Analysts Believe Rate Increases Will Continue
The Federal Reserve will decide on Wednesday whether to raise interest rates. Stronger consumer confidence and overall economic growth, including a drop in unemployment, could mean rate increases of up to 1.75% before the end of this week. With American interest rates increased, companies could be less likely to borrow and invest, which could lead to stagnation in the stock market.
JP Morgan analysts have predicted that rates could continue to increase in 2018 and 2019. Reuters reported JP Morgan Analysts predicting that “the worst case is the ’18 and ’19 dots both move up. The Fed [Federal Reserve] is currently guiding to five hikes in ’18 and ’19 but under this scenario that would shift to seven hikes.”
Other large financial groups, including Australia’s Westpac bank, have expected the Federal Reserve to maintain their confidence and stick to the plan for continued rate increases drawn out over two years to reduce the impact.
Currency Markets Also Affected
In addition to stock market impact, global currencies have also seen increased trade on the back of news that interest rates increases are all but confirmed. The Japanese Yen (JPY) has been performing well, and the Euro (EUR) went up slightly by 2 points over the weekend.
Rate increases are clearly going to change the economic landscape, and investors will need to be mindful of just how heavy the impact may be. This week should be one of caution, as we wait to see just how much of an impact will be made following the Fed’s pending Wednesday announcement.
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