UAE markets welcome Federal Reserve interest rate hike

Analysts forecast a better end to 2015 after Abu Dhabi and Dubai both rebound strongly on first US increase in nine years.

The US Federal Reserve raised interest rates for the first time in nine years. AFP

UAE stocks rebounded on Thursday, joining global equities in getting a lift from the US Federal Reserve’s first rate hike in nine years.

Investors took comfort from the fact that the faucet for ultra cheap money has only been partially tightened and further increases would be gradual even as the price of crude, a key commodity for the oil-rich Arabian Gulf, continued to flounder. The US dollar also resumed its rally as GCC countries, most of which peg their currencies to the greenback, hiked their own rates.

The Dubai Financial Market General Index jumped 2.9 per cent, while Abu Dhabi’s key measure, the Abu Dhabi Securities General Market Index, rose over 2 per cent. Dubai’s measure had fallen to a low of two years this week as confidence in future corporate profit growth slid amid oil’s drop.

“It’s a relief rally now that the key decision has been finally been made,” said Muhammad Shabbir, the head of equities at Rasmala Investment Bank in Dubai.

“A lot of people are expecting the year may end on a better note. We’re seeing money flowing back into markets, mainly from local investors.”

While the UAE, the world’s sixth-biggest producer of oil, is more economically diversified than many of its Gulf neighbours, the Federal Government still relies on revenue from the sale of oil to fund more than 60 per cent of its budget. Crude has shed more than 50 per cent of its value in the past 18 months. Production in countries including the United States has risen, while demand has waned amid economic uncertainty in key consuming markets such as China, the world’s second-biggest economy.

Janet Yellen, the head of the Fed, said on Wednesday that she was satisfied enough with the American economic recovery to begin raising interest rates following near-zero rates since the global financial crash of 2008, the country’s biggest economic crisis since 1929.

But she emphasised that the central bank of the world’s largest economy would take a gradual approach when it came to further tightening.

Analysts agreed. Russ Koesterich, the chief global investment of BlackRock, the world’s largest asset manager, said he forecast that the Fed would raise rates two or three times next year.

“We believe the Fed would be gradual in terms of their tightening cycle,” Mr Koesterich said in Toyko, according to Reuters.

Rick Rieder, BlackRock’s chief investment officer of fundamental fixed income, said: “In fact, we believe the path of rate increase is likely to involve two rate hikes in 2016, after this initial December move.”