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David Rosenberg: Fed Rate Hike Leads List of 7 Risks for Investors

David Rosenberg: Fed Rate Hike Leads List of 7 Risks for Investors

(Stock Photo Secrets)

By    |   Friday, 23 September 2016 02:38 PM

Stocks rose after the Federal Reserve held a key interest rate near record lows with the Nasdaq reaching record highs.

The central bank’s easy-money policies that help equities can also become a risk when the Federal Open Market Committee eventually decides to raise borrowing costs, perhaps as early as its December 14 meeting.

David Rosenberg, chief investment strategist at Gluskin Sheff & Associates Inc., lists Fed policy atop 7 key risks that investors need to consider in their outlook.

“Every single FOMC official has a rate hike in the forecast by year-end, but three – and something tells me [Fed Chair] Janet Yellen is one of them – see ‘one and done through 2018,” Rosenberg says in a Sept. 23 report obtained by Newsmax Finance. “And that makes sense because when you think about it, nothing is more sacrosanct to a central banker than price stability.”

Central banks throughout the world have cut rates and bought debt securities since the 2008 financial crisis in an effort to encourage borrowing and spending. Critics say the easy-money policies have created the third major asset bubble in past 16 years while punishing retirees who depend on a fixed income and pension funds that face insolvency.

Rosenberg says if the U.S. economy shows signs of growing by 2.4 percent in the fourth quarter from the prior year and the unemployment rate falls to 4.8 percent from 4.9 percent now, the Fed would be more likely to raise rates in December.

“At last count, the futures market was priced 57 percent of the way for a late-year rate increase, which is far from fully priced in, but about the same degree as we had this time last year and the Fed did indeed make a strike two months hence,” Rosenberg says.

7 Event Risks for Investors

Federal Reserve: “The Fed is still in play, with the markets handicapping nearly six in 10 odds of a December 14 move,” Rosenberg says. This risk echoes the Fed's interest-rate hike of last December — after which stocks fell 13.3 percent to a 2016 low of 1,829.08 by February 11.

U.S. Elections: Polls show Democrat Hillary Clinton leading Republican challenger Donald Trump by a few percentage points. The candidates on Sept. 26 begin the first of three debates that may sway the opinions of undecided voters. “The November 8 election is a wild card and a Trump win is being priced at 35 percent odds,” Rosenberg says.

Italy Vote: Italian voters, most likely in November, will be asked to vote on changes to the country’s constitution. The outcome of the vote will set off a chain of events that may affect the stability of Italy’s current government, the solvency of Italian banks and whether the country remains in the European Union.

Bank of Japan: Japan’s central bank this week embarked on a new, untested policy of “yield curve control” designed to keep the 10-year Japanese government bond yield near current levels of about 0 percent. The Bank of Japan’s ability to devalue the yen may hinge on whether the Fed makes the dollar more expensive with a rate hike in December.

Brexit Steps: U.K. voters in June approved a measure to leave the European Union. One of the next steps in that process is to invoke Article 50, the section of the EU treaty that addresses leaving the euro zone. The timeline for the Brexit and the country’s future relationship with the EU are open-ended.

Elections in Germany, France, Netherlands: Elections in these countries may also have an effect on eurozone policies such as trade, immigration and monetary union. “Europe remains a source of global instability,” Rosenberg says.

Financial Stress: The rise in the London interbank offered rate, which helps to determine the cost of capital worldwide, has led to worries about growing risks in the global financial system. The difference between Libor and the TED spread, which itself is the difference between interest rates on interbank loans and short-term U.S. government debt, in the past few months has risen from 20 basis points to 60 basis points. That level “is the widest since May 2009 (when the U.S. banks were priced for near-involvency),” Rosenberg says.

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David Rosenberg, chief investment strategist at Gluskin Sheff & Associates Inc., lists Fed policy atop 7 key risks that investors need to consider in their outlook.
David Rosenberg, risk, Europe, investing
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2016-38-23
Friday, 23 September 2016 02:38 PM
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