Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Rising Interest Iates and Lower Stock Market Before End of 2010

Interest-Rates / US Interest Rates Jan 16, 2010 - 09:22 AM GMT

By: Lorimer_Wilson

Interest-Rates

Best Financial Markets Analysis Article"The unprecedented run in the equity markets has boosted confidence among households and helped solidify the economy's shaky foundations. The improving economic outlook undoubtedly applies increasing pressure on the U.S. Federal Reserve and Bank of Canada to hike interest rates from record-low levels. Are traders and investors ready for the end of nearly free money?" asks Paul Vieira of The Financial Post in an article entitled 'The End of Free Money'. Below are edited excerpts from Vieira's article examining the repercussions such increased rates would have on the economies of Canada and the United States.


Timing and Magnitude Crucial

As Mark Chandler, fixed-income strategist at RBC Capital Markets said, "The next thing now, then, is how we are going to normalize rates. We are at emergency levels, but we are no longer in an emergency situation. So it's a question now of timing and magnitude."

U.S Fed Rate to Rise to 1.00% and Canada to 1.25%?

At present, federal fund futures - which provide a gauge of market expectations for U.S. Federal Reserve interest rates - are pricing in a policy rate of 0.90% by the end of 2010, up from its current target range of 0% to 0.25%. That means markets are expecting roughly 75 basis points to nearly a full percentage point in interest rate hikes. A similar instrument in Canada pegs the Bank of Canada's overnight rate to rise 100 basis points, to 1.25%, in the same timeframe.

Will U.S. or Canada Raise Interest Rates First?

Mr. Chandler adds that the biggest debate in financial markets is what the size of the first rate hike from either the Fed or the Bank of Canada will be with views on the timing and magnitude of rate hikes being all over the map. Complicating matters is the recession that just passed was like no other which might cause central banks to keep rates too low for too long to stoke private-sector demand. To top it off, Mark Carney, the governor of the Bank of Canada, would dearly like to avoid raising rates before his U.S. counterpart for fear of further appreciation in the Canadian dollar.

Will Rise Adversely Affect Stock Valuations?

Regardless of which country is first and which country raises their rates the most, however, investors had better get used to the idea of rising rates, just as they should understand that the great global stock market rebound can't carry on forever.

As a starting point, findings from a CIBC World Markets analysis suggest every 100-basis-point increase in the central bank's overnight rate knocks stock valuations down by roughly 5%. Others differ. David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, for one, says the first few rate hikes following an easing period generally have little impact on the immediate direction of equity markets and Peter Buchanan, senior economist at CIBC World Markets, believes that, regardless of when the tightening starts, the initial impact should be negligible for publicly-traded Canadian companies.

Will Rise Adversely Affect Dividend Paying Stock?

In a report Buchanan recently co-authored, he indicated there's little risk that dividend-paying companies - which tend to be highly exposed to interest-rate movements - would scale back dividend payments in the event of tightening. "If anything, this past recession saw a milder rise in the TSX payout ratio than what we've seen in past economic downturns," the report says. It adds firms are paying out only 40% of consensus 2010 operating earnings in dividends - a smaller amount compared to the previous downturns in the early 1990s and 2000s. That provides some assurance that dividend-paying issuers won't be caught in a trap once borrowing costs rise.

Will Rise Adversely Affect Bonds?

As for asset classes to avoid in an era of pending rate hikes, money managers and advisors appear universal in their dislike of longer-term fixed income.  Michael Sprung, president of Sprung & Co. Investment Counsel in Toronto says, "The fear is that when interest rates rise, the prices for long-fixed instruments will fall precipitously."

Mr. Sprung, who believes there's a risk of a double-dip recession, said once interest rates begin to rise "people are going to start to worry about the stamina of this recovery. That could cause commodity prices to come off a little bit, which would be reflected in the TSX."

Still, there are those, such as Andrew Pyle, a wealth advisor and markets commentator at ScotiaMcLeod, who indicate that market participants are prepared for central bank tightening - and would welcome the development. "They are ready to engage that question now, and some market participants would be ready if it meant protecting against even higher interest rates down the road by putting a cap on where long-term borrowing rates and mortgages will go," he says. "We are starting to price in supply risk and inflation risk. If that's not arrested any time soon, then those long-term rates will continue to rise and that becomes a risk for the equity markets, as debt-servicing costs for businesses and households go up." Indeed, a Bank of America-Merrill Lynch report has warned that 10-year yields above 5% could prove "destabilizing" for the markets. What could push such a move are concerns of uncontrolled government spending.

How Soon Will Interest Rates Rise?

Prior to this recession, the prevailing wisdom was that central banks commence policy tightening roughly six months after the unemployment rate peaks. Recent job data in Canada indicate the labour market has indeed stabilized, and there are signs of a turnaround in the United States. Economists at BMO Capital Markets said in a recent note they expect U.S. unemployment to peak this quarter, and have tentatively penciled in a rate hike from the Fed in September. As for Canada, they forecast the Bank of Canada to begin tightening in July, once its conditional pledge to keep rates at 0.25% ends.

Others differ, however, with perhaps the most controversial call of all coming from analysts at Goldman Sachs, who believe the Fed will not raise interest rates for two years. Buchanan maintains that central-bank tightening will not begin until into 2011 saying "We are starting from fairly low rates at this point in time, but one thing to bear in mind is that Canadian corporate balance sheets are in good shape. Debt-to-equity levels are quite low and that means if rates go up, that won't be a lot of stress on companies from a financial standpoint."

Too High, Too Soon?

The bigger impact comes during the final rate hikes in a tightening stage because they tend, more often than not, to push an economy into a tailspin. Perhaps the most stunning example was in 1937-38, when Fed moves to withdraw stimulus pushed the U.S. economy back into a deep tailspin and sent markets reeling.

Fortunately, there's little concern Ben Bernanke, the U.S. Fed chairman who is a student of the Great Depression, would allow history to repeat itself and tighten too soon. The same goes for Mr. Carney.

Really?

Editor’s Note: The above article is an abridged and enhanced (where appropriate) version of the original. The author’s views and conclusions are unaltered. Lorimer Wilson (editor@MunKnee.com)

Lorimer Wilson is Editor of www.FinancialArticleSummariesToday.com (F.A.S.T.) and www.MunKnee.com (Money, Monnee, Munknee!) and an economic analyst and financial writer. He is also a frequent contributor to this site and can be reached at editor@munknee.com."

© 2010 Copyright Lorimer Wilson- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Lorimer Wilson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules