Recently, there has been a wave of correction in global stock markets. The market generally believes that this is similar to the adjustment reasons in the first quarter of last year, that is, the interest rate of U.S. 10-year Treasury bonds rose rapidly and the expectation of interest rate increase was strong, which triggered the market adjustment.
How does the Fed’s interest rate hike affect global asset pricing and a shares?
Through the resumption of the three interest rate increase cycles of the Federal Reserve since the 20th century, databao found that during the interest rate increase cycle of the Federal Reserve, the global stock market tends to fall first and then rise, while the performance of the A-share market is relatively independent.
Since the 20th century, the Federal Reserve has experienced three interest rate hike cycles. The first rate hike was from June 1996 to May 2000. The background of interest rate increase was mainly to curb the Internet bubble, and the benchmark interest rate was raised from 4.75% to 6.5%. The second increase rate period was from June 2004 to June 2006, the benchmark interest rate rose from 1% to 5.25%. The background of interest rate increase was mainly against the then real estate bubble. The third interest rate increase cycle is from December 2015 to December 2018, and the benchmark interest rate is raised from 0.25% to 2.5%. The background of interest rate increase is mainly the normalization of monetary policy.
In the third interest rate increase cycle, the active table reduction was also implemented, which was discussed in March 2017, the table reduction plan was given in June, announced in September and implemented in October. In other words, in the last interest rate increase cycle, the table reduction and interest rate increase were carried out at the same time. The specific time points and rhythms are as follows: in May 2013, taper (reducing asset purchase) expectation was guided; in 2014, taper raised interest rates for the first time in December 2015, the second time in December 2016, and after two interest rate increases in March and June 2017, it was announced in September 2017 that the table will be reduced from October of that year and the interest rate will continue to be increased in December 2017, In 2018, the interest rate was raised four times and the table was reduced simultaneously, and the tightening ended in 2019.
it’s only a matter of time for the fed to raise interest rates
There is a lot of evidence that the Fed is on the verge of raising interest rates. The minutes of the December meeting of the Federal Reserve said that the current job market is “very tight” and inflation is serious. Central bank policymakers may ask the Federal Reserve to raise interest rates in advance and start reducing its holdings of assets at the same time.
In addition, US bond yields have risen rapidly since December 2021. Data show that since the end of last year, the yield of 10-year US Treasury bonds has risen by nearly 30 basis points, reflecting that market participants began to digest the expectation of raising interest rates at a faster speed.
Bank Of Communications Co.Ltd(601328) it is expected that the Fed’s quantitative easing will end in March 2022, after which the Fed may start the process of raising interest rates in due time, and may raise interest rates three times in 2022.
The Fed may raise interest rates only “sooner or later”. On the whole, the United States is indeed facing inflationary pressure, but the data on consumption, employment and production in the same period reflect that the economic recovery is not sufficient and the conditions for raising interest rates are not fully met. Bank Of Communications Co.Ltd(601328) believes that whether and when to raise interest rates will depend on inflation and employment in the United States.
the short-term interest rate hike has a significant impact on the global stock market
How does the Fed’s interest rate hike affect global asset pricing? In theory, as a global currency, most central banks will have to choose to follow the fed to raise interest rates and protect the exchange rate, which will have a short-term impact on the stock market. With the continuous advance of the interest rate increase cycle, the market became less sensitive to interest rates, and the stock market began to bottom up. The above transmission mechanism is also confirmed to a certain extent through the double disk history.
According to the statistics of data treasure, the 16 major stock indexes in the world rose by 13.71% on average one month before the first interest rate increase cycle of the Federal Reserve; In the first month of the second interest rate increase cycle, the world’s major stock indexes fell by an average of 1.18%; In the first month of the third interest rate increase cycle, the world’s major stock indexes fell by an average of 0.82%.
After the start of the first interest rate hike cycle of the Federal Reserve, the global stock market reversed its upward momentum, and the global major stock indexes fell by more than 3% on average the next month after the first interest rate hike; The short-term negative impact of the second interest rate increase cycle is more obvious. The global major stock indexes fell by nearly 10% on average in the month following the interest rate increase; The month after the beginning of the third interest rate hike cycle fell by an average of more than 2%.
It can be seen that before the Federal Reserve raised interest rates, it had little impact on the market. In the short term after the interest rate increase, it significantly impacted the global stock market .
during the interest rate increase cycle, the stock market has a high probability of rising
From the perspective of the whole cycle, during the first three interest rate hikes by the Federal Reserve, US stocks, European stocks, Hong Kong stocks and emerging market stock markets rose to varying degrees, indicating that interest rate hikes will impact the stock market in the short term, but it is difficult to change the long-term upward trend of assets.
According to the statistics of data treasure, during the first fed interest rate increase cycle, that is, from June 1996 to May 2000, the average increase of major stock indexes in the world was close to 15%; During the second interest rate increase cycle, the average increase of major stock indexes in the world was close to 43%; During the third interest rate hike cycle, the average increase of major global stock indexes was close to 17%.
However, it should also be noted that the Fed’s interest rate hike is likely to be the same as that from 2015 to 2018, starting to raise interest rates and shrink the table at the same time, which may lead to greater fluctuations in asset prices. According to the data, in the last interest rate increase cycle, the Dow Jones industrial index fluctuated sharply in 2015 and 2018, which was different from that in normal years. History will repeat itself, but it is by no means a simple repetition. The impact of the Fed’s three interest rate hikes on global stock markets cannot be simply copied. For a more comprehensive analysis, we might as well compare the last interest rate increase cycle with the current valuation of US stocks.
According to data treasure statistics, on the first interest rate increase day of the third interest rate increase cycle, the Dow Jones industrial index’s rolling P / E ratio was 18.36 times, accounting for 74% of the quantile of P / E ratio since 2000; The NASDAQ index has a rolling P / E ratio of 31.84 times, accounting for 41.46% of the quantile of P / E ratio since 2000. According to the latest data, the Dow’s P / E ratio is 24.87 times, ranking 92.92% of the quantile of P / E ratio since 2000; The price earnings ratio of the NASDAQ index is 36.01 times, accounting for 56.74% of the quantile of the price earnings ratio since 2000.
From this point of view , the current valuation of US stocks is at a relatively historical high, and the impact of interest rate hike on US stocks will be more obvious than the last time.
A-share market performance is relatively independent
Overall, in the first three fed interest rate hike cycles, there was no significant impact on the world’s major stock indexes before the interest rate hike, but there was a significant impact after the interest rate hike. So, what is the impact of the Fed’s interest rate hike on the A-share market?
Data show that the Shanghai Composite Index and Shenzhen Composite Index led the rise in the first month before the Fed’s first interest rate increase cycle, while they led the decline in the first month after the interest rate increase. In addition, the performance of the two major indexes of Shanghai and Shenzhen in the second and third interest rate increase cycles is not quite synchronized with the global stock market. throughout the cycle, the Fed raised interest rates for the first and third time, and both Shanghai and Shenzhen indexes fell.
It can be seen that the performance of the A-share market has more followed its own rules in the previous three interest rate increase cycles of the Federal Reserve. The market generally believes that the root of the more independent performance of A-Shares is that China is still a foreign exchange control country, and there are no conditions for large-scale import and export of assets, which fundamentally determines that the Fed’s interest rate increase will not have a great impact on the stock market.
The current relative overvaluation of the US stock market is also different from the previous interest rate increase cycle, and the interest rate increase may also increase the volatility of US stocks. The policy orientation of the Federal Reserve affects the monetary policy of central banks around the world. With the gradual integration of the A-share market into the world, it is bound to be more or less affected. At the same time, it should also be noted that A-Shares are more affected by China and are relatively more independent, both in terms of capital and fundamentals.
China’s independent monetary policy also determines that A-Shares are more independent from the global market. Under the expectation of US interest rate increase, China cut interest rates in the opposite direction. On January 17, the 1-year MLF interest rate and 7-day Omo interest rate were reduced by 10 basis points. On January 20, the market quoted interest rate (LPR) of one-year loan was reduced by 10 basis points and the market quoted interest rate (LPR) of five-year loan was reduced by 5 basis points. Boc International (China) Co.Ltd(601696) believes that the trend of wide credit is further clarified.
The relatively undervalued value of the A-share market also helps to maintain stability in possible global market fluctuations. According to the statistics of data treasure, the current rolling P / E ratio of Shanghai stock index is 13.61 times, which is relatively low in the global stock market, ranking 25.41% of the quantile of P / E ratio since 2000.
The probability of independent trend of A-Shares is high, but the performance of each sector may be differentiated. Taking history as a mirror, the impact of the Fed’s interest rate increase cycle on the growth sector with high valuation is more obvious. The data show that one month after the first interest rate increase in the second interest rate increase cycle, the NASDAQ fell by more than 11%, surpassing the Dow; One month after the first interest rate increase in the second interest rate increase cycle, the decline of the NASDAQ index exceeded that of the Dow index by 4 percentage points.
under the background of relatively historically low valuation, the value sector of A-Shares may be stronger than the growth sector. since January this year, the Shanghai index has fallen by more than 2% and the gem index has fallen by more than 7%.
In the third round of interest rate hike cycle, the performance of the value sector of A-Shares is also significantly stronger. Among them, one month after the first interest rate increase in the third cycle, banks, steel, coal and other value sectors were the most resistant to decline. In the whole interest rate increase cycle, the two major consumer sectors of food and beverage and household appliances rose against the market, and the sectors such as banking, steel and coal showed the most resistance to decline. The growth sector performed poorly, with the media, environmental protection, computer and other sectors leading the decline.
