How will the Fed rate hike play out on equities?

Market players believe the rate hike is likely to make the market nervous

Fed Chair Janet Yellen has signalled that the US central bank could hike rates at its March 14-15 policy meeting. While the interest rate rise is a negative for equities, optimism around economic recovery in the US and Europe is keeping sentiment bullish. In the run-up to the Fed meeting, foreign flows and equity returns across emerging markets have been strong. Market players, however, believe the rate hike is likely to make the market nervous, which could drive prices lower. Investors would keenly watch the Fed’s guidance on future hikes. The previous two increases in benchmark rates were in December 2016 and December 2015. On both occasions the market had reacted differently. Emerging markets and currencies had plunged after the December 2015 rate increase, while the market was not flustered by the latest hike in December 2016. It remains to be seen if the market would go the 2015 way or 2016 way after the next Fed hike.