The era of negative interest rates is coming to an end? - September 18, 2016

The era of negative interest rates is coming to an end?

Investors’ mood is getting worse on the Wall Street since last Friday when another Fed official mentioned the need for rate hike. Last time we saw such a fall on the markets was right after the Brexit referendum. Soon after that, the optimism returned. In September however volatility is back again, and, as every year, S&P 500 may perform worst in this season.

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S&P 500 index
The next meeting of the Fed will be on 21st of September and the market doesn’t really know what to expect from the board lead by Janet Yellen. On the one hand, there's a growing expectation for a rate hike, even if the market is counting with a chance of 22-25%, but on the other hand, the communication of the Fed is always changing and some macroeconomic indicators are weaker than they should be.

However, the Board of Governors soon will have to realize that negative interest rates are not helping but hurting the economy in several ways. They destroy the profitability of the banks and without them there’s no healthy economic growth. It’s important to see that the usual dogmatic solutions aren’t working either: with close to zero interest rates people spend their money rather than saving it. In the meanwhile, a different movement can be seen in the economy too. People close to retirement are realizing that their savings are shrinking, so they try to save up even more. This panic-driven saving isn’t good for the economy either: it stops spendings almost altogether.

Generally speaking, we still believe that an interest rate around 1-2% might be a lot better for the economy and not only some Fed executives started to agree but Europe may shift its beliefss soon.

Until now, markets underestimated rate decisions so when investors realized their importance they became a bit unsure and started to sell stocks. In the meanwhile, the bond market bubble has started to blow out and yields are on the way up. This affected the stock markets in the last days and probably the volatility and uncertainty will remain in the coming weeks.

All this resulted in important corrections and may be used for buying instruments since forecasts didn’t change in the last days. What’s more, the end of the era of negative interest rates may put back rates in the banking sector on the right way.