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Nov 26, 2015

Global investor sentiment deteriorates ahead of expected Fed rate increase

Sentiment in Europe rises as ECB seen diverging from Fed monetary policy moves

Global investor sentiment deteriorated in November as markets worldwide brace for a move toward tighter monetary policy by the US Federal Reserve, and as war, terrorism and an economic slowdown in emerging markets dominate headlines.

State Street’s Global Investor Confidence Index (ICI) fell 7.2 points this month to 106.8 from a revised reading of 114 in October, led by an 11.1-point drop in the North American ICI, the firm says in a press release. The Asian ICI declined 9.3 points to 100.7, just inside positive territory. The European ICI, however, gained 6.3 points to 96.5 as expectations increased for further measures to stimulate the region’s economy, a reverse of the trend expected in the US.

‘In November, the spotlight was once again on the Fed as investors adjusted to an increased probability of a December rate hike,’ says Ken Froot, who helped design the index, in the press release. ‘The North American sentiment resonated globally, signaling investors’ lack of readiness for US policy normalization, even if the pace is expected to be gradual.’

Investors in the US and elsewhere largely expect the Federal Reserve to raise interest rates on December 16 for the first time since 2006 followed by further gradual increases, ending years of stimulus that has boosted markets. The rising expectation was further raised by the terrorist attacks in France, rising tension in the Middle East and news of economic slowdowns in Brazil, China and other emerging markets.

In Europe, however, the European Central Bank (ECB) is widely expected to offer greater stimulus to ease fears of encroaching deflation, diverging sharply with the expected direction of the Federal Reserve.

‘European sentiment has seen some improvement in response to the prospects of further ECB stimulus,’ says Jessica Donohue, executive vice president and chief innovation officer of State Street Global Exchange. ‘Divergence in monetary policy, however, was not enough to bring European sentiment above the risk-averse threshold. Moreover, Asian optimism has seen a sharp turnaround as a stronger dollar and continued commodity price declines weigh heavily on the region.’