US stock futures weak pre-Fed – how a 'higher for longer' stance can impact global markets

The term 'higher for longer' refers to a monetary policy where interest rates remain elevated for an extended period. This is in contrast to short-term rate hikes followed by quick reductions. The idea is to manage inflation and economic growth over a longer term.

A 'higher for longer' policy in the US could lead to sustained foreign investment shifts and increased market volatility.

A 'higher for longer' stance by the Fed could have a significant impact on 10-year Treasury yields. Typically, long-term yields rise when the market anticipates a prolonged period of higher interest rates. The anticipation has already led to a spike in 10-year yields to nearly 5%, a 16-year high.

In October, Fed Vice Chair Philip Jefferson told a conference that he would “remain cognizant of the tightening in financial conditions through higher bond yields” in assessing “the future path of policy,” echoing similar comments from other policymakers in recent days.

The Fed's policy doesn't just affect the US; it has global repercussions. Emerging markets are particularly sensitive to US monetary policy. A 'higher for longer' stance could lead to capital outflows from these markets as investors seek higher returns in the US.

The Indian market is not immune to shifts in US monetary policy. A 'higher for longer' stance by the Fed could lead to a stronger US dollar, putting pressure on the Indian rupee. This, in turn, could affect India's import bills and contribute to inflation. Additionally, sectors like IT and pharma, which earn revenues in dollars, could see mixed effects. While a stronger dollar could boost earnings, the overall uncertainty could lead to market volatility.

The spike in yields can also impact equities, as prominent investor Adrian Mowat pointed out in an interview with CNBC-TV18. Mowat said he will closely watch the US bond market to see if they break above 5%. "If we get that comfort over the next month or so, then I think you will start to add to risk assets and that would include the Indian market, but for now I would be cautious.”

Veteran global investor Mark Mobius of Mobius Capital Partners also had a similar view. “People have got to be ready for a correction along the way because a lot of people will look at the market and say, Hey, why should I go into stocks when I can get 5% for my money?” he told CNBC-TV18 in an exclusive chat.

Higher interest rates usually strengthen the US dollar, making dollar-denominated commodities like oil more expensive for foreign buyers. Interest rate hikes aimed at taming inflation also slow economic growth and reduce oil demand. A 'higher for longer' policy could sustain this trend, potentially dampening global demand for oil and affecting oil-producing nations.

Gold often serves as a hedge against inflation and currency fluctuations. A prolonged period of higher interest rates could boost the US dollar, making gold less appealing as an alternative investment. However, if the 'higher for longer' stance leads to concerns about economic stability, gold could regain its lustre as a safe haven.

Gold started November on a softer note ahead of the Fed policy after concerns over the Middle East conflict boosted the safe-haven asset's prices above $2,000 an ounce last month. Spot gold fell 0.2% to $1,978.36 per ounce by 0351 GMT on Wednesday, while U.S. gold futures dropped 0.4% to $1,987.00.

The Federal Reserve's potential 'higher for longer' stance has far-reaching implications, affecting everything from Treasury yields to global commodity markets. As the world waits for the Fed's announcement, market participants will be keenly watching for any signs that could indicate the future trajectory of global financial markets.