CTAs’ Reaction to the Fed Increasing Rates

Last month, the Fed decided to increase interest rates by 0.25% for the first time since the financial crisis. Officials cited that the economy was growing stronger and required less help from the central bank.  The Fed mentioned job growth as a key reason for raising rates as unemployment fell to pre-recession levels. 

Now that it’s been a month since rates were increased, we thought we would take a survey of a few CTAs to see if they notice any immediate changes to the trading environment.  Here are their thoughts:

Discretionary, Technical CTA

“The recent Fed rate hike has certainly had a big effect on the markets in recent weeks.  Volatility around most asset classes has increased dramatically for a couple of key reasons.  First there is a continuing argument now whether the hike was necessary or just a face saving move that should have occurred months ago.  Second, the global economy since the summer has appeared to dramatically slow and with China’s recent troubles now seems that the Fed may have tightened right into a slowdown.  There is the potential they may need to now reverse this decision if the economic conditions continue to deteriorate.  This will most likely create more uncertainty but also more opportunities than we have had in a number of years.”

Stenger Capital Management (View Performance)

Short-term, Systematic CTA

“Since the recent Fed rate hike, we’ve seen a noticeable absence of intraday momentum. While overnights have driven the equity markets directionally, intraday has seen unusual chop. We feel the first half of 2016 is very unpredictable, with the recent first Fed rate hike providing a measure of uncertainty. Such an event increases the chance of an upcoming market cycle change, and thus heightens general uncertainty. During Q1, we anticipate higher volatility, as participants attempt to determine where they should place bets. In such an environment, potential herd behavior increases the chance of sudden sharp market moves.”

Turning Wheel Capital (View Performance)

Discretionary, Diversified Global Macro CTA

“The Fed rate change is irrelevant to the current trading environment and will have minimal impact on the markets in 2016.  It is too well anticipated and too marginal in magnitude.  The monetary policies of China (F/X reserves down $700 billion since mid-2015), Japan and Europe (both of which are maintaining or expanding their monetary and fiscal deficits) will offset any US rate hike impact.”

Coloma Capital Futures (View Performance)

After reading the thoughts above, it is interesting to see how opinions on the market environment vary based on the different types of CTAs.  Furthermore, short-term CTAs may be looking to decipher changes in short-term market trends, while a more long-term trader is looking to analyze the “bigger picture” impact of a rate hike.