Central Bankers from the UK & Canada joined their EU and US counterparts this week by taking a far more hawkish tone towards interest rates than was expected. These comments suggest that the extended period of stimulus and easy money that has seen the inflation of asset prices around the world may be coming to an end.
Both the GBP and the CAD rose sharply on the back of the surprise comments. Volatility has returned to equity markets across the globe, and bonds have moved in anticipation of increased rates. While some of the recent moves can certainly be attributed to end of month/quarter/half year flows, the changing tone of the markets is also a consideration.
This shift in tone from neutral/dovish to hawkish has taken markets somewhat off guard. With the “summer trading season” officially starting this week with the July 4th long weekend, traders would generally expect lower volume and volatility. As noted on this blog, I was preparing for a slow summer this year, however those expectations have shifted.
The market is undergoing a significant process of reorganisation at the moment. The highly publicised rotation out of tech stocks and into financials in the US is just the start. If the global regime of low interest rates is actually shifting, expect these cyclical rotations to continue around the world.
It’s important to consider what the effect of a shift in rate policy has on your portfolio or trading. Here’s some interesting questions to ask yourself:
- How will higher rates impact equity markets as a whole? What about specific sectors?
- How will higher rates affect the housing bubbles that have appeared in certain cities around the world?
- If you trade Forex, think about the impact that fundamental data has on the chances of rate changes, especially in light of this change in tone.