Rising rates a seminal point
27 May 2015
The biggest effect on the global investment markets since the GFC has been negligible or zero interest rates, especially in the US, the world's biggest economy. This has skewed investment options everywhere. To put it simply, the cost of capital, the very core of capitalism, has all but disappeared across the developed world (although certainly not the developing world).
So it is of great investment significance that the cost of capital is starting to return in America. There are growing signs that some sort of "normality" is being restored as the AFR reports:
"US central bankers are considering the risk of raising rates prematurely against having to play catch-up if they wait too long, Fed vice chairman Stanley Fischer said in a speech in Israel on Monday. He reiterated that the decision to increase borrowing costs would be "data determined", and a matter of "going from an ultra expansionary monetary policy to an extremely expansionary monetary policy".
Fed chair Janet Yellen said Friday it would be "appropriate" to raise rates this year if the economy improves.
"We've had a two-month correction to the downside to the dollar and I think that's ended," Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co, said during a radio interview with Bloomberg Surveillance. On dollar-yen, "we're approaching psychological, important levels that will convince more people that they can't fight this dollar uptrend". The 125 yen per dollar level is key, he said.
The dollar has gained 8.9 per cent in the past six months against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen rose 3.7 per cent, while the euro fell 6.8 per cent.
The Commerce Department's report on orders showed total bookings for durable goods, those meant to last at least three years, declined 0.5 per cent in April, matching the median forecast of economists surveyed by Bloomberg. They were depressed by a pullback in procurement from the military. Excluding defence, orders increased 0.2 per cent last month."
Given that the US has the world's deepest stock market, this development is of significance for equity markets world wide. In the short term, higher interest rates are likely to depress share prices. But the underlying economic improvement that is occurring is likely to lead to stronger equity marikets over time. What effect that will have on the Australian market, which is about two fifths banks, is problematic. But the GFC's impact may finally be starting to diminish.