Higher interest rates won’t stop this stock rally

Tourists take a picture with the market bull near the New York Stock Exchange in New York City.
Spencer Platt | Getty Images
Tourists take a picture with the market bull near the New York Stock Exchange in New York City.

Some may say the move by the Federal Reserve last night was a hawkish one while others maintain their view that the Fed delivered according to the market's expectations.

It all depends on your perspective. If you compare the Fed's actions to last year's decision, you could confidently say that it was not particularly hawkish at all as the Fed was expecting four rate hikes for this year. However, if you compare this to their last meeting, then the hawkish argument does make sense because the Fed was only expecting two rate hikes for 2017, but now they expect three rate hikes.

In our opinion, their action was neutral because Janet Yellen played the perfect tactical game and said nothing when it came to the fiscal spending impact. She is in the dark when it comes to this topic and she cannot say how the Fed will react until they see how the economy will shape itself on the back of President-elect Donald Trump's fiscal spending.

The best approach was to deliver the message that the Fed is flexible in their approach and this is what she delivered on.

Looking at the dollar rally or the U.S. two-year Treasury yields, it appears that traders are labelling her move as a hawkish one. The dollar has rallied further and the U.S. Treasury yield has surged further. This is a trade which you will make only if you think the Fed is thinking about increasing the interest rate at a faster pace.

The precious metal has seen some punishment as a result of the Fed's decision, but as we previously predicted, it was not an extreme one. The downward move for metal has not raised many eyebrows at all.

But one thing which is causing dissatisfaction among traders is that perhaps now we may not see that 20,000 level on the Dow Jones Industrial Average so soon as traders start to show their hesitation.

Nonetheless, we think that this equity rally still has more steam left in it and it should continue once the dust has settled. The reason is simple, that is that the Fed is increasing the interest rate on the back of a stronger economy.

Commentary by Naeem Aslam, chief market analyst at ThinkMarkets. Follow him on Twitter @NAEEMASLAM23.

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