The Market Ding-Dongs. Investing in a Directionless Market.
Where is the US interest rates going?
Major banks and financial institutions have predicted that the Central Bank of America will reduce interest to boost a slowing economy. However, the spike of the ten year bond yields to a new high had many analyst reversing their verdict. They are now worrying that the Central Bank may raise interest rates instead to stem inflation. This probably explains the volatility of markets with big jumps on the both directions.
The Implications of Interest Rates
The interest rates is probably one of the most important economic indicator in the world of finance. Interest rates can affect assets ranging from equities, bonds, to property and gold price. A fall in the interest rates will usually be favorable to the economy. When borrowing is cheaper with a lower interest, companies will borrow more and expand their business. Individuals will buy property instead of renting as it is now cheaper to buy. Depositors will have a lesser incentive to park their money in a savings deposits and prefer to either invest or spend. Therefore, any rates drop will result in a favorable stock market while the reverse is true. Therefore, during the past month, the stock market is confused at where the interest rates might go. The economy is slowing down and investors thought that the Federal bank will lower rates to push the economy back to growth. On the other hand, inflation still persist with a current high oil price of $71 and investors are more aggressive in spending and investing.
The General Direction will be: UP!
There are two factors that will affect the direction of the market. Fundamental and Sentiments. Fundamental is a good indication of the long term trend of the market while sentiments, will dictate the short term direction of markets. The interest rates concerns lead to a swinging sentiments, which will also result in a ding dong market. Fundamental is still good with good global economic growth and low interest rates. The sector that may potentially surprise the investors will probably be Japan and Western Europe.
Japanese banks are flushed with cash. However, the local investors are unwilling to invest, rather keeping their deposits at close to zero interest rates. Fundamentally, the Japanese market has the strength to lead a massive rally. However, with no sentiments, it is sometimes better to hold back and wait for the sentiment to improve first before plunging in. Western Europe has one of the lowest valuation now that Asia becomes relatively more expensive. Currently, the Euro zone is raising interest rates to put a lip on inflation. The stock market reacted negatively as a result of this rate hike. Once the interest rate hikes stopped, the Euro zone will become an attractive market again.
Looking at the Risk
The greatest immediate risk comes from the sub prime debt in US. Sub prime loans are loans lent to people who probably has a high chance of not paying the money back. When the sub prime problem first occurred in the first quarter of 2007, it seems like it's impact is limited. A few months later, 2 hedge funds from Bear Stearns announced that they are in trouble due to the sub prime loans. Bear Stearns announced a multi-billion dollar bailout, one of the largest hedge fund bail out in the history. How far reaching is the impact of the sub prime debt? No one can tell until the full impact plays out. However, as long the damage is limited, the global equity markets will still have a few more good years to go.
We still favor Asia, especially Taiwan and Korea. Europe is still a good country to stay invested. Bonds will remain weak for the next few years. We will expect that the market will be very volatile as the market becomes confused by the different pull and push factor. Investing in trenches will allow investors to ride out the lows and highs in a swinging market. There will still be good times ahead!
Where is the US interest rates going?
Major banks and financial institutions have predicted that the Central Bank of America will reduce interest to boost a slowing economy. However, the spike of the ten year bond yields to a new high had many analyst reversing their verdict. They are now worrying that the Central Bank may raise interest rates instead to stem inflation. This probably explains the volatility of markets with big jumps on the both directions.
The Implications of Interest Rates
The interest rates is probably one of the most important economic indicator in the world of finance. Interest rates can affect assets ranging from equities, bonds, to property and gold price. A fall in the interest rates will usually be favorable to the economy. When borrowing is cheaper with a lower interest, companies will borrow more and expand their business. Individuals will buy property instead of renting as it is now cheaper to buy. Depositors will have a lesser incentive to park their money in a savings deposits and prefer to either invest or spend. Therefore, any rates drop will result in a favorable stock market while the reverse is true. Therefore, during the past month, the stock market is confused at where the interest rates might go. The economy is slowing down and investors thought that the Federal bank will lower rates to push the economy back to growth. On the other hand, inflation still persist with a current high oil price of $71 and investors are more aggressive in spending and investing.
The General Direction will be: UP!
There are two factors that will affect the direction of the market. Fundamental and Sentiments. Fundamental is a good indication of the long term trend of the market while sentiments, will dictate the short term direction of markets. The interest rates concerns lead to a swinging sentiments, which will also result in a ding dong market. Fundamental is still good with good global economic growth and low interest rates. The sector that may potentially surprise the investors will probably be Japan and Western Europe.
Japanese banks are flushed with cash. However, the local investors are unwilling to invest, rather keeping their deposits at close to zero interest rates. Fundamentally, the Japanese market has the strength to lead a massive rally. However, with no sentiments, it is sometimes better to hold back and wait for the sentiment to improve first before plunging in. Western Europe has one of the lowest valuation now that Asia becomes relatively more expensive. Currently, the Euro zone is raising interest rates to put a lip on inflation. The stock market reacted negatively as a result of this rate hike. Once the interest rate hikes stopped, the Euro zone will become an attractive market again.
Looking at the Risk
The greatest immediate risk comes from the sub prime debt in US. Sub prime loans are loans lent to people who probably has a high chance of not paying the money back. When the sub prime problem first occurred in the first quarter of 2007, it seems like it's impact is limited. A few months later, 2 hedge funds from Bear Stearns announced that they are in trouble due to the sub prime loans. Bear Stearns announced a multi-billion dollar bailout, one of the largest hedge fund bail out in the history. How far reaching is the impact of the sub prime debt? No one can tell until the full impact plays out. However, as long the damage is limited, the global equity markets will still have a few more good years to go.
We still favor Asia, especially Taiwan and Korea. Europe is still a good country to stay invested. Bonds will remain weak for the next few years. We will expect that the market will be very volatile as the market becomes confused by the different pull and push factor. Investing in trenches will allow investors to ride out the lows and highs in a swinging market. There will still be good times ahead!
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