Li Xunlei: What is the impact of this round of Fed tightening on global asset prices?

Li Xunlei, Chief Economist of Zhongtai Securities

　　Zhongxin Finance, February 16th, Question: Li Xunlei: What is the difference in the impact of this round of Fed tightening on global asset prices?

　　Author Tang Jun, Chief Analyst of Financial Engineering, Zhongtai Securities Research Institute, Li Xunlei, Chief Economist of Zhongtai Securities

　　As the Fed's attitude to withdraw from quantitative easing (QE) and raise interest rates becomes more and more clear, there are a lot of studies in the market focusing on the impact of the Fed's previous tightening on asset prices. The author starts from two unusual phenomena, focusing on Analyze how the macro backdrop for this round of Fed tightening is different, and how the impact on the economy and asset prices is different.

　　In terms of phenomena, the author believes that at least two performances after the formation of the Fed's tightening expectations are significantly different from the past. The first phenomenon is that when interest rates start to rise, US stocks are more sensitive than gold; the second phenomenon is that the US raises interest rates and China cuts interest rates , the RMB has appreciated against the US dollar.

　　Phenomenon 1 reflects market expectations that may be high inflation in the United States and a large increase in interest rates in the future, while the strength of economic recovery may be weak.

In the early stage of interest rate rise, U.S. stocks were so sensitive when the risk premium was not close to 0, which may reflect the market's concerns about the future rate of interest rate rise under high inflation pressure.

The Fed's tightening and rising interest rates are mainly based on inflationary pressures rather than economic recovery, which also makes US stocks more sensitive.

Likewise, the dollar price of gold is determined by the US real interest rate (nominal interest rate - inflation rate), and gold's insensitivity to rising interest rates also directly reflects expectations of high inflation.

　　The second phenomenon may indicate that the attractiveness of the US dollar has declined, and the status and attractiveness of the US dollar may be shaken, which means that the current round of Fed tightening may not be as strong as before.

　　Behind the above two unusual phenomena is that the macro background of this round of Fed tightening is different from that of the past: First, the inflation pressure faced by the United States is far greater than that of the previous round; second, the economy and employment forms faced by the United States are more complex. ; Third, the attractiveness of the US dollar has declined; fourth, US stocks are highly dependent on low interest rates.

　　Based on this, the author believes that the impact of this round of Fed tightening on asset prices is mainly reflected in the following aspects. First, the attractiveness of the US dollar has declined. After the tightening, the return of the US dollar may not be as good as before, and US bonds are losing QE buying. Post-interest rates may rise rapidly, while the upside of the US dollar index may be lower than expected.

　　Second, U.S. stocks are highly dependent on low interest rates, and there is great pressure on short-term adjustments.

Tech giants in the U.S. stock market over the past decade have contributed to most of the index’s gains, and tech giants have played an important role in boosting stock repurchases with leverage in an environment of high profit margins and low interest rates.

In the long-term low interest rate environment, the valuation of U.S. stocks is at a high level, and rising interest rates will bring greater adjustment pressure to U.S. stocks.

However, once inflation pressure eases in the future, the United States will return to a low interest rate environment under economic and employment pressures, or after the valuation of US stocks is adjusted to a reasonable level, the technology giants that enjoy global technological monopoly in US stocks will be sought after again.

　　The third is that it may have an impact on the short-term sentiment of gold, and it is still optimistic in the medium and long term.

With the Fed raising interest rates under high inflation, the real US dollar interest rate may not rise.

In the medium and long term, once the floodgate of U.S. debt monetization is opened, it will be difficult to stop, which will shake the position of the U.S. dollar in the world and be optimistic about the performance of gold in the medium and long term.

　　Fourth, the impact on the European market is greater, and the impact on emerging markets is weaker than the previous round.

In the past ten years, Europe, which has also implemented QE and ultra-low interest rate policies, has increased its holdings of US treasuries more, while other economies have slowed down significantly.

Therefore, during the tightening of the Fed and the rise in US interest rates, the return of funds from Europe may be stronger, and the impact on emerging markets may be lower than in the past.

The appreciation of the dollar against the euro has been significantly higher than that of other major currencies each time the Fed is expected to raise interest rates recently, which may confirm the above judgment.

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