The power of the Fed

Hungary's central bank (NBH) has, for the fifth consecutive policy meeting, left the base rate unchanged at 8.00% in line with market expectations. The central bank is currently ignoring the fact that the forint is so strong against the Euro and focusing much more in the inflationary pressures. Capital market trends continued to strongly influence the Budapest exchange. The Budapest Stock Exchange was lifted on the international optimism fueled mostly by the rather-positive announcements from the US Federal Reserve (Fed) and the maintenance of interest rates in the US. The Fed kept its target for the federal funds rate, an overnight bank lending rate that helps determine rates on credit card, home equity and other loans, at 5.25 percent. One of the biggest bones the Fed threw to the markets in its last statement was its omission to directly mention the problems developing in the sub-prime mortgage market, taking that as a sign that rising defaults among borrowers with poor credit histories may not be that big of an issue. Sub-prime borrowers, those with poor or limited credit records or high debt burdens, made up about a fifth of all new mortgages last year. Many investors interpreted that rates in the near term would not be raised and that the Fed might even start cutting them if need be later this year.
Although the relationship between interest rates and the stock market is fairly indirect, the two tend to move in opposite directions. A decrease in interest rates means that those who are buying securities such as bonds have a decreased opportunity to make income from interest. Assuming investors behave rationally; a decrease in interest rates prompts investors to move money away from the bond market to the equity market, helping the prices of stocks to rise as there is a transfer of capital from selling their bonds and buying stocks. At the same time, businesses enjoy the ability to finance expansion at a cheaper rate, thereby increasing their future earnings potential, which leads to higher stock prices. Investors and economists alike therefore view lower interest rates as catalysts for expansion since they lower business costs, boost corporate profits, and consequently stock prices.
Oil prices rises Crude oil prices were up for the whole last week on fears that supplies would be disrupted as international tensions increased over Iran's nuclear program and its detention of British sailors and marines since last Friday.
This latest escalation of tensions in the oil-rich Gulf sent the Amex Oil Index (XOI) up a 7% advance for the week. The XOI is an index of the leading companies involved in the exploration, production, and development of petroleum. It measures the performance of the oil industry through changes in the prices of the stocks that they comprise.
MOL, Hungary’s biggest oil and gas refinery, has been lifted since last week in part by the global geopolitical tensions in Iran and the influence of a higher price of the XOI index.