Investors bet on Fed leaving rates unchanged

A US flag hangs above an entrance to the New York Stock Exchange on Aug 26, 2015.
A US flag hangs above an entrance to the New York Stock Exchange on Aug 26, 2015.PHOTO: REUTERS

Gold prices rise, stock markets continue rally ahead of announcement, but greenback falls

The decision on whether United States interest rates are going up this month was not due out until this morning, but investors had made up their minds long before and placed their bets.

The feeling across most markets yesterday was that rates would be left unchanged, a sentiment that sent gold and shares up but the US dollar down.

Gold rallied as much as 1.4 per cent on Wednesday while many equity markets rose again after increases on Tuesday.

The Straits Times Index added 0.9 per cent to close at 2,895.81.

Japan and Taiwan each gained 1.4 per cent, Malaysia rose 2.1 per cent and Jakarta was up 1.1 per cent. Only Hong Kong and Shanghai declined.

SPLIT OPINION

Although opinion is split among investors as to whether or not the Fed will raise rates, fresh purchases and short covering pushed gold higher and seemed to support the view that the Fed would hold off from increasing rates at the September meeting.

MR JAMES STEEL, an analyst at HSBC Securities (USA) 

The extended rally yesterday suggested that investors had expectations of "continued accommodative monetary environments", Phillip Futures investment analyst Howie Lee said.

Unchanged US interest rates would make the greenback less attractive, and so it proved yesterday with falls against most major currencies. The Singdollar was one: It strengthened to 1.3985 against the greenback from 1.4021.

Gold has been tightly aligned to interest rate speculation this year.

The uncertainty over the timing of a rate hike has been weighing on the yellow metal, sending it down 5.6 per cent since early January.

Higher rates will make gold less appealing as an investment as it does not pay interest and costs money to hold. Its rise this week is as clear an indication as any that investors believe any rate hike will be postponed for later in the year.

"Fresh purchases and short covering pushed gold higher and seemed to support the view that the Fed would hold off from increasing rates at the September meeting," said Mr James Steel, an analyst at HSBC Securities (USA).

Gold prices for immediate delivery were around US$1,118 per ounce yesterday.

As well as the turbulent financial markets and a weakening Chinese growth outlook, recent US economic data will have played a central role in the US Federal Reserve's decision.

On the inflation front, consumer prices fell 0.1 per cent last month from July, the first drop since January.

With US Federal Reserve officials already concerned that consumer price increases are running below their target rate of 2 per cent in recent months, a rise in rates would add to the risk of deflation.

More data was released yesterday. August showed a sustained strength in the housing market, which should help support economic growth.

Jobless claims tumbled last week to their lowest level in two months, which points to a tightening labour market.

An improvement in the labour market will be one of the key factors the Fed would have taken into account in coming to its decision.

A version of this article appeared in the print edition of The Straits Times on September 18, 2015, with the headline 'Investors bet on Fed leaving rates unchanged'. Print Edition | Subscribe