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THE INVESTOR
ANALYSIS
OPINION
How the US – and other
markets – are getting
the jitters over imminent
interest rate rises
ByAnthony Hilton
I
nvestors could sometimes be forgiven
for thinking they have strayed into a
parallel universe. Established wisdom
has it that the time to buy shares is
when pro ts are rising; when there
is an abundance of economic growth and
optimism about the future.
But the nancial crash of 2008 and the
massive economic dislocation that followed
changed the rules. Fearful of another
1930s-style depression, central banks ooded
the world with cheap money. It was as if the
system had su ered a heart attack.To keep
it alive the central bankers put it on life
support; rst to keep it alive and then to
help it slowly recuperate.
But the drug of ‘cheap money’ has had side
e ects.A world of arti cially low interest
rates puts upward pressure on asset prices
as investors search for yield. Property, bond
and share markets around the world are at,
or are close to, record highs, even in countries
where economic growth is weak and the
recovery feeble.
And hence the burning question of the
day: if economic growth is feeble, what
will sustain markets once the arti cial
stimulus is removed?
In turn, this triggers the counterintuitive
reaction of markets.When they see signs
that the world’s economy is on the mend,
they don’t see it as a good thing.They fear
that it will mean the end of the life-support
programmes. Hence the bizarre outcome
that any sign that we might be getting back to
normal may be taken as a signal to sell.
The central bankers now understand all
too clearly the risks of moving too fast.The
past few months have seen some choppy days
and weeks – particularly in the bond markets,
when investors thought theAmericans were
about to raise rates.At rst, the Fed seemed
not to care too much whether overseas
markets had a tantrum, believing it need
only concern itself with what works best for
the US domestic economy. Now it seems
to better understand that, in a globally
integrated economy, even problems arising
in a small country far away can potentially
impact on everyone. Bank of England
governor Mark Carney underlined this in
April.Wearing the hat of chairman of the
Financial Stability Board, he warned that
turmoil in the bond markets as investors
adjusted to a rate hike could all too easily spill
over and do damage to the real economy.
Now fully attuned to the dangers, Janet
Yellen at the Federal Reserve, and Carney,
keep signalling that the rst upwards rate
moves are still some way o – later this year
perhaps or early next – stressing that when
they do come they will be small and gradual,
meaning most borrowers should be able
to absorb the rise without distress.They add
that rates are unlikely to rise to anywhere
TORONTO STOCK
EXCHANGE
CAD$2.6trn
market
capitalisation
1,577
More than
companies
3,500
More than
companies
70
More than
50
marketplaces in
countries
NEW YORK STOCK EXCHANGE
$27trn
market
capitalisation
$70bn
from 129 IPOs
in 2014
Raised
NASDAQ
CHAIN
REACTION
GLOBAL INTEGRATED
ECONOMY
