The US government ten-year yield has seen significant fluctuations since the COVID crash, with a current rate of 4.3%, looks meaningfully bound towards 5.3%. This increase in interest rates has the potential to make a considerable impact on the financial system moving forward.
Impact on Emerging Markets
One of the most noticeable effects of rising US interest rates is the impact on the flow of funds towards emerging markets. As interest rates rise in the US, investors may find better opportunities domestically, leading to a decrease in funds allocated to emerging markets. This shift can have repercussions on the economies of these countries, potentially leading to reduced investment and slower growth.
Strengthening of the Dollar Index
Furthermore, rising US interest rates often fuel the rise of the dollar index. The dollar index reflects the value of the US dollar against a basket of major currencies. During the COVID crisis, the dollar index dropped to around 90 levels but has since been on an upward trajectory. Currently, the dollar index is approaching the 106 mark, which may act as a major resistance level. If this level is overcome, there is a possibility of a significant upward trend in the dollar index.
Impact on Oil Prices
Another crucial factor influenced by rising US interest rates is oil prices. Currently, oil has broken out of its range at $80-$87 and is heading towards $103 as a potential target. Increased interest rates can impact oil prices due to their influence on the strength of the dollar. As the dollar strengthens, the purchasing power of oil-exporting countries decreases, potentially leading to higher oil prices.
USD to INR Exchange Rate
The strength of the US dollar also has implications for currency exchange rates. In the case of USD to INR, the exchange rate has remained above 83. This suggests that the rupee is waiting for a significant move, the timing of which remains uncertain. The potential depreciation of the Indian rupee against the US dollar can have repercussions on international trade and foreign investment in India.
Headwinds for the Market
These factors collectively present a set of headwinds for the financial market. While the market may not be fully taking cognizance of these factors currently, they have the potential to create turbulence in the future. Once these factors come into focus and enter the limelight, we may witness a shift in market sentiment and increased volatility.
Large Cap Market as a Safe Haven
Interestingly, the large cap market, which is predominantly the domain of institutional investors, has not seen substantial increases compared to other segments of the market. This implies that there is currently no froth or excessive speculation in the large cap market. From a risk perspective, this provides some level of safety for investors seeking stability and reliable returns in uncertain times.
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