On December 16, 2015, the Fed implemented its first rate hike in years. At the time, the Fed had decided that conditions were ripe for quantitative tightening in the form of an interest-rate rise. Despite global weakness, collapsing emerging markets and massive capital flight from countries like Russia, China etc., the Fed went ahead with a 25-basis point hike in interest rates. The impact of such a decision cannot quite be quantified in isolation given that multiple factors have been affecting global economic performance. The commodity price rout was spearheaded by an oversupply in crude oil (Brent crude and WTI), leading to historically low prices in the $25 – $30 per barrel range. This dragged equities markets lower, as oil is seen as the proverbial fuel that drives economic growth. The correlation between equities and crude oil is unmistakable, and this is especially true with indices like the S&P 500 index.

From the Macro to the Micro

Mini-recoveries and collapses notwithstanding, we are seeing a general increase in positive speculative sentiment with commodities, and to a lesser degree equities. The price of crude oil is now well above its January lows, and is trading in a range between $31 and $36 per barrel. Iron ore has been the biggest recent winner, having gained an incredible 19% on Monday, 7 March on the back of positive statements by Chinese authorities and their commitment to growing the world’s second-largest economy at a rate of 6.5% – 7% for 2016. This type of sentiment naturally acts as an incentive to investors who wasted no time snapping up mining company stocks which all showed incredible gains at the start of the second trading week in March. All the while, crude oil prices are steadily increasing and the Fed is faced with the unenviable task of determining whether interest rates are warranted, viable and the correct decision at this juncture.

How to Protect Yourself with Rising Interest Rates

In February 2016, 41% of Americans polled by Bankrate expressed concern about rising interest rates in the country. The impact of rising interest rates is well known to those who have mortgages, long-term loans, car financing, credit card debts and other financial obligations. In the same poll, 18% of Americans are concerned about how increasing interest rates will impact upon their personal financial situation. 16% of those polled are concerned about how rising interest rates will impact upon stock prices and their financial portfolios. In all instances, it should be borne in mind that the impact of something as significant as interest rates will not be seen overnight. It takes time for the interest rates to work their way through various components of the economy and filter down to individuals in their households. A good way to hedge against interest rate hikes at this juncture is to refinance from variable interest rates to fixed interest rate repayments.

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