This Wednesday there was a expected Federal Reserve interest rate hike of the US, with investors attentive to the clues given by the US central bank on the duration and depth of the tightening of monetary policy to control the growing pressures on prices.
the fed raised its benchmark interest rate by 75 points basics for the third time, at a range of 3%-3.25%at the end of their two-day meeting, which was followed by a press conference by their president, Jerome Powell.
1) recessive scenario. An increase in interest rates in the US would shorten the terms for the US economy to slow down sharply and even fall into recession. Lower economic activity in the US, with global contagion, will reduce the demand for goods and services that emerging countries like Argentina will not be able to escape.
Ruben Ulluatechnical analyst of financial markets, commented that “a new rate hike by the Fed was quite discounted, for that reason it is more important not only the magnitude of the rise but obviously what is said after the decision and, from there , technical scenarios arise to monitor”.
Ullúa added that “the market seems very skeptical. If you read the different analyzes you will clearly see many things have been discounted, among them that The Fed is going to maintain a tough position going forward, which is going to generate a recessive scenario for the economy. We are seeing some signs in Europe in this sense and in some way this is going to get worse”.
“What is this ‘priced‘ (translated to prices) in the next six months for the benchmark rate?” he asked. German Fermo, Head of Strategy of the IEB Group (Invest in the Stock Market). “Today the market awaits her in 4.50% maximum -from 2.50-, therefore in the next six months they will imply a rise of 200 basis about what you have today priced the market, we would arrive between March and June 2023 at that level and from there, the Fed would pause and start lowering the reference rate”. And he added that “4.5% doesn’t sound like much, but relative to the zero we had a year ago it’s important.”
2) Weak stock prices. Monetary tightening will have a double impact from a financial point of view. On the one hand, it could put pressure on a falling stock prices, which on Wall Street have just touched recent lows in June. It will be “rain on wet”, because in 2022 on balance it gives a negative 19% for the S&P 500, -26% for the technological Nasdaq, and -15% for the Dow Jones Industrials.
A second impact would come from the hand of a higher risk aversion investor. Higher yields in the US serve as a “vacuum cleaner” of funds from the world to be invested in the US, which pushes down emerging stocks and bonds. He takes Argentine assets in a recovery period, with an S&P Merval that maintains a 16% dollar gain in 2022, with an economy mired in its own crisis.
3) Insurmountable country risk. For Argentine bonds the scenario is more delicate. The Global bonds of the exchange recovered 12% from the price floor exhibited in the third week of July, but they are still 50% below the prices registered when they were released on the market two years ago.
“We see how the US debt curve has inverted, with a sharp rise in the two-year rate, which has already reached levels of 4%. All this generates a state of great nervousness and it is being discounted that the Stock Market should take its toll on this whole scenario and the shares could become cheaper in the coming weeks,” said Ullúa.
A rate hike on US Treasury bonds will make them more attractive, a move that will further marginalize emerging market debt. In that case, it will be very difficult for Argentina to reduce its country risk of 2,400 pointsa surcharge that leaves the Government without access to international credit.
4) A stronger dollar. The Fed’s rate hike was anticipated in the behavior of currencies, which were devalued against the US dollar. The euro remains below the “one to one” level against the greenback. And for emerging currencies this was more eloquent. From last June to the present, the dollar in Brazil rose 11%, from 4.65 to 5.18 reais. In China, the dollar has risen since last April – when the beginning of a devaluation process was evident – also 11%, from 6.37 to 7.05 yuan, a maximum since June 2020.
Faced with the Fed’s fifth rate hike so far this year, analysts at Personal Portfolio Investments They noted that “the dollar DXY Index remains firm with a further rise of +0.5% early this morning to touch 110.80 points, its highest level in the last 20 years”.
For the vulnerable Argentine peso, this process of global strengthening of the dollar, which drags the currencies of the country’s main trading partners, will exert greater pressure for a devaluation wider range of the official exchange rate.
5) And the raw materials? The Fed rate hike should contribute to a drop in commodity prices or commodities listed in dollars on international markets. The continuity of the war between Russia and Ukraine neutralized this expected movement in the last eight months. For Argentina the greatest risk could come on the side of a drop in prices of its main export products: soybeans, flour derivatives, soybean oils and residues, wheat and corn, even at levels close to their historical maximums. Meanwhile, the high Argentina’s energy deficit, of the order of USD 7,000 million this year, requires a drop in the international prices of liquefied natural gas.