Global markets take cues from what the US Federal Reserve does

By Aditya Sesh

As we all know, the US Fed is a very important Central Bank not just for the United States but even globally. When a country is also the largest borrower and the largest investor in the world everything that the country does become important for the world. The banking of the US government is managed by the US Federal Reserve as the Central Bank and therefore anything that it does moves the needle.

The external debt of the United States is 24 trillion dollars approximately equal to 96 % of its GDP. The direct investment of the United States abroad in 2021 was around 9.765 trillion dollars. Foreign investors hold close to 3.2 Trillion worth of US treasury notes and securities issued by US agencies.

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To put it in a global perspective, the global debt is $ 300 Trillion and the US owes to the world a tad less than 10%. The total global FDI is $41 trillion dollars and US accounts for 23% of the global FDI.

US is the largest importer in the world importing goods worth $2.4 Trillion equivalent of 13.4% of global imports. The US exports $1.753 trillion dollars out of the global 21 trillion dollars equal to 8.34% of global exports.

As you can see from the figures the US is a centre for money flow. It is both the largest borrower and one of the top investors globally. Money movement is one of its main industries.

Foreign governments, banks and almost everybody hold the US dollar as a reserve. Everywhere it is the transaction currency. Given this size it is undoubtedly true that the US money movements do affect the world markets.

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In recent times, the US has had inflation of close to 8.5%. This was of concern to the Fed and thus it had to increase the interest rates. As the US interest rates rose, many other central banks also had to increase interest rates in different ranges to prevent money being sucked out of their reserves to the US.

It impacted the US equity and global equity markets to different degrees. From a near zero at the beginning of this year, today the Fed has raised interest rates to 3.75% which could go upto 4.5% by 2023.

The S&P 500, the US equity Index has contracted by 15% in the last 12 months, so have most global equity indices. The increase in interest rates also lend themselves to increase in borrowing costs for US and global businesses as banks and lenders benchmark their base rates with fed rates.

This has also caused an inflow of dollars into US banks leading to sharp dollar appreciation against all major currencies globally.

The US economy seems to be progressing towards recession for at least a 2-year period. The US is also the largest trade partner to many economies globally. Thus, recession in the US lends itself to lower business for other economies that export to it. Due to its being number 2 in the world in terms of exports and the dollar appreciation, exports from the US have also become costlier. The US fed interest rate hike apart from the war situation would also end up contributing to decrease in global economic growth. It is therefore evident that the global markets will move in sync with US fed rates and US markets in varying degrees. How much the sync will be with the US will depend upon the times to come.

(Author is Founder and Managing Director of Basiz Fund Service)

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