Optimistic VS Pessimistic View

There may be views that i am overly pessimistic, which is an image that i do not want to portray...

Lets look at possible optimistic views from this point of time.

 

1) ECB does not raise rates

This is the most optimistic point of view. Fed's pressure will be relieved. USD will strengthen and commodity prices will go down.

However, Europe is in danger of rising inflation and inflation spirals with rising wages.

 

2) ECB raise rates, but Fed speaks of higher rates, following ECB.

This is the 2nd possible optimistic point of view, with ECB Chairman all but assured of an interest rate increase in Europe, a pause in rates does not seem possible at this point of time. What Fed can do instead is to relieve the knee jerk reaction by suggestion US interest rates will rise(if not more than ECB) in tandem, and of course, actions must be taken along to support the talk, instead of only hot air.

 

Inflation in Europe is taken care of, growth in Eurozone may be compromised, especially with Presidents coming out and say that the ECB is compromising growth, making their jobs difficult.

On the US side, however, people will be shaken. With super cuts in interest rates not too long ago, Fed is now raising rates, and has to signal that it is on an uptrend. Growth will be serverely compromised, as businesses extend retrenchments and cut excesses, stops spending and scale down ops. People will start saving instead of spending, preparing for a major downturn, when rates are increased in low or negative growth times. Stagflation is a REAL possibility.

 

However, USD will strengthen, as increasing interest rates will support the dollar, while growth lay on worries to the dollar.

 

3) any other scenarios from the above 2

This is not an optimistic one at all, Fed's reaction is not to market's expectation. USD will tank to no end. Interest rate difference will cause heavy selling on US denoted instruments. Money outflow will cause lower inflation, but investors will take so much money out of US that no one will stay in US. Foreigners will turn to rising rates areas like Euro and RMB.

 

Conclusion

 

It is not that i am too pessimistic, but that even the most optimistic view is dark.

 

Hee Teck

 

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