The Federal Reserve is the largest participant in the inter-bank loan market in the United States, and its financing will account for a large proportion of other financial institutions. Therefore, after the Fed raises the interbank lending market interest rate, on the one hand, the cost of borrowing money from the Fed will rise, and the financing interest rate provided by financial institutions will also rise. On the other hand, financial institutions will raise deposit interest rates to attract deposits and increase currency reserves.
For the US stock market, after the deposit interest rate is raised, investors are willing to deposit funds in banks, which will reduce the circulation of US dollars. However, after the loan interest rate increases, it will be difficult for enterprises to raise funds, which will lead to a decrease in cash flow, so the funds flowing into the stock market will decrease. The stock market needs funds to promote it. When the funds are reduced, the stock market lacks kinetic energy, which will lead to a decline in the stock price, so it is bad. A serious interest rate hike may cause the US stock market to plummet. Although the United States is at the center of the global economy, when US stocks fall, domestic A-shares tend to follow suit.
After the opening of Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect in China, the proportion of foreign capital in the A-share market has increased significantly, and the proportion of China capital invested in markets other than A-shares has also increased. After the Federal Reserve raised interest rates, the deposit interest rate in the United States rose, which may lead to the outflow of A-share funds from the United States, and the lack of momentum in the stock market led to a decline in stock prices.
The Fed's interest rate hike will also cause the US dollar to appreciate and the RMB to depreciate against the US dollar. If China does not raise interest rates accordingly, RMB assets will become unattractive. At this time, foreign investors may sell their A shares to increase their dollar assets. Moreover, the depreciation of RMB is unfavorable to industries that need to import raw materials and have high foreign debts. Especially for foreign trade enterprises, RMB depreciation means spending more money on raw materials, and the cost of some imported enterprises will increase accordingly, which is not conducive to the trend of stock prices.
Generally speaking, the Fed's interest rate hike is not good for the stock market.