Low rates are here to stay
If there was any doubt in the past few months about the future of near term interest rates, it should have all but evaporated this week. The Bank of England’s “expected” move sees rates in the UK at a ridiculously low level. Australia’s Reserve Bank decision to cut to an all time low of 1.5% cash rate, at a time when GDP is still above trend near 3%, saw almost no immediate impact from lenders or the currency market.
The world is now accepting these two things:
– Low rates are here to stay for a while. It’s been almost 7 years since the 2009 financial collapse and we are now closer to a turning point than at any other time.
– Incremental monetary policy changes are having very little impact (the law of diminishing returns).
Where interest rates go is no longer the key question. We think the Fed might move in the fourth quarter of this year, but we rate this as a 50% chance at best. Even if they do move, it would have taken a whole year to make the adjustment. Just goes to show how fragile the state of the global economy really is.
We think the key theme to watch is fiscal policy. Governments and their Central Bankers may be worried by now that inflation right around the world is at risk of dipping further. Fiscal policy is the only game in town. Most of the developed world is so far deep into debt anyways that there is no incentive to turn back from pushing ahead further fiscal measures.
There will be winners and losers from fiscal expansion. The most immediate losers may be taxpayers, they need to find government expansion. The reward may be delayed and so retailers who have rallied hard in the past two years on the back off lower interest rates might be reaching their valuation caps.
We issued a trading update on JB Hi-Fi today for Invast clients with exact entry and exit points. As we go into corporate reporting season in Australia, the realisation that fiscal policy needs to take centre stage may start to emerge from companies in their outlook statements. As with declining monetary policy, there were key winners and losers. Fiscal policy expansion will be exactly the same.
If you’re not an Invast client, it might be a good time to get your trading account ready. You can self-navigate through our simplified account opening process here.
Chief Market Analyst
Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia. The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.