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  • FIRST POST
    • Sue58
    • By Sue58 11th Mar 17, 9:39 AM
    • 32Posts
    • 1Thanks
    Sue58
    US Interest Rate Rise
    • #1
    • 11th Mar 17, 9:39 AM
    US Interest Rate Rise 11th Mar 17 at 9:39 AM
    Will the US market rise even further to an all time high, if as expected the US interest rate goes up next week?
Page 1
    • colsten
    • By colsten 11th Mar 17, 9:49 AM
    • 8,460 Posts
    • 7,013 Thanks
    colsten
    • #2
    • 11th Mar 17, 9:49 AM
    • #2
    • 11th Mar 17, 9:49 AM
    Please pay £20 to my Paypal account so I can consult my crystal ball for you. Proof that I have got one:

    • coyrls
    • By coyrls 11th Mar 17, 10:04 AM
    • 747 Posts
    • 734 Thanks
    coyrls
    • #3
    • 11th Mar 17, 10:04 AM
    • #3
    • 11th Mar 17, 10:04 AM
    Maybe, maybe not.
    • bowlhead99
    • By bowlhead99 11th Mar 17, 10:23 AM
    • 6,164 Posts
    • 10,860 Thanks
    bowlhead99
    • #4
    • 11th Mar 17, 10:23 AM
    • #4
    • 11th Mar 17, 10:23 AM
    Will the US market rise even further to an all time high, if as expected the US interest rate goes up next week?
    Originally posted by Sue58
    As a general rule if interest rates rise it is negative for the stock markets of that country for several reasons:

    - it is harder for businesses to borrow money to help them grow or maintain the business and expand their profits

    - consumers in that country have less money to spend because their mortgage costs are higher and loans and credit cards are more expensive and saving is relatively more attractive than spending. Lower spending on goods and services equals lower revenue for the companies on the stock market.

    Those things slow the economy and can reduce growth and employment. Then:

    - when an investor is looking at how much he is willing to pay for a company, and the base interest rate is pretty high, it's relatively less attractive to buy shares in a company or existing bonds issued by a company for the same price that was being asked the day before. That's because the excess of your potential returns from the investment over what you could get from a simple cash deposit or new low risk bond, is not so high as it was earlier.

    So for all those reasons, and some other more subtle ones (including effect on exchange rates and potential exports by US companies etc), generally an increased interest rate is a negative event for markets, not a positive one.

    Of course, in some circumstances like now when the rates have been really really low for ages (to avoid hurting the economy), an uptick in the interest rate is not quite so negative as people might have expected from the above theoretical reasons... because it is a sign that if the central bank are willing to put the rates up and risk slowing the economy, they must think the economy is generally doing pretty well to be able to 'handle' that rate rise, so that's generally a positive vibe.

    When the markets think there is a potential for something to happen at a forthcoming Fed announcement (like in interest rate will increase, decrease, or stay the same) the market prices will reflect the best guess of what would happen.

    So if it's believed likely (but not 100% certain) that rates will go up next week, the market will move a lot closer to where it would end up in the case of the rates announcement being 'rate rise' than where it would end up if the announcement would be 'rates on hold' or 'rates going down'. Most of the expected movement is 'priced in'. Then when the actual announcement is made, and it's what everyone was expecting anyway, the market won't move too much, it will just move the little extra bit to its final position, because it had already moved nearly all the way.

    So, if you and the media and the investors around the world nearly all think that there is going to be a rate rise next week, which would have caused a small market drop, then the share prices will already move close to where investors think they will end up - for example on 10 March the US indexes are already a percent or so below where they ended on 1 March. So may not be much more of a move.

    The other aspect for you as a UK investor is that the pound to dollar exchange rate is affected by difference in interest rates between the countries and expectations for the future interest rates movements. If the dollar interest rate is higher than the pound interest rate, investors around the world would find it relatively more attractive to buy US dollars and hold them with US banks, or to buy US government bonds and so on, than to hold pounds. So they will sell pounds and buy dollars, or borrow pounds to invest in dollars. That change in the supply and demand for dollars will make dollars more expensive to buy, in terms of how many pounds you have to pay for a dollar.

    So as a US rate rise gradually becomes more likely, or closer to happening, and then actually happens, dollars start to cost more pounds (be worth more pounds). So your Microsoft share which sells on the stock market for $65 is worth more pounds to a UK investor with a strong dollar than if $65 was worth fewer pounds. Since a US rate rise started to sound more likely over the last couple of weeks (together with other negative effects on the pound like Brexit getting closer), the dollar has gone from being worth 80p two weeks ago to 82p today. If the interest rate rise does indeed go ahead it will potentially make the dollar worth even more pence.

    So, the US market could fall a little bit (because most but not all the interest rate rise is priced into the US stock market level at the moment) but dollars could be worth more pounds (because most but not all of the exchange rate change is priced into the currency market level at the moment) - and then the net effect of the change in the value of your US shares, when translated to pounds, would be pretty much nothing.

    Taken at face value though, your question 'would a US rate rise push the US stock market to an all time high' the answer is probably 'no, you have got that backwards'. Because the effect of an interest rate rise is (usually) to dampen down the profitability and attractiveness of the companies in the market, not increase them - as per the first few paragraphs above.
    Last edited by bowlhead99; 11-03-2017 at 10:26 AM.
    • badger09
    • By badger09 11th Mar 17, 2:47 PM
    • 4,692 Posts
    • 3,877 Thanks
    badger09
    • #5
    • 11th Mar 17, 2:47 PM
    • #5
    • 11th Mar 17, 2:47 PM
    Please pay £20 to my Paypal account so I can consult my crystal ball for you. Proof that I have got one:

    Originally posted by colsten

    That might be your crystal ball colsten, but I don't think they are your hands holding it
    • Freecall
    • By Freecall 11th Mar 17, 3:21 PM
    • 1,034 Posts
    • 922 Thanks
    Freecall
    • #6
    • 11th Mar 17, 3:21 PM
    • #6
    • 11th Mar 17, 3:21 PM
    Please pay £20 to my Paypal account so I can consult my crystal ball for you. Proof that I have got one:

    Originally posted by colsten
    Talking of balls, if punters fancy trying and forecast the forex markets then they really need two of them.

    ..
    • Sally57
    • By Sally57 16th Mar 17, 10:43 AM
    • 40 Posts
    • 4 Thanks
    Sally57
    • #7
    • 16th Mar 17, 10:43 AM
    • #7
    • 16th Mar 17, 10:43 AM
    After the US rise in the interest rate the markets worldwide have indeed risen and the FTSE is at an all time high!
    • talexuser
    • By talexuser 16th Mar 17, 11:46 AM
    • 2,166 Posts
    • 1,643 Thanks
    talexuser
    • #8
    • 16th Mar 17, 11:46 AM
    • #8
    • 16th Mar 17, 11:46 AM
    They are hoping it is a small step back to normality rather than central bank "5 year plans". Time will tell if markets are right.
    • economic
    • By economic 16th Mar 17, 11:51 AM
    • 1,147 Posts
    • 530 Thanks
    economic
    • #9
    • 16th Mar 17, 11:51 AM
    • #9
    • 16th Mar 17, 11:51 AM
    As a general rule if interest rates rise it is negative for the stock markets of that country for several reasons:

    - it is harder for businesses to borrow money to help them grow or maintain the business and expand their profits

    - consumers in that country have less money to spend because their mortgage costs are higher and loans and credit cards are more expensive and saving is relatively more attractive than spending. Lower spending on goods and services equals lower revenue for the companies on the stock market.

    Those things slow the economy and can reduce growth and employment. Then:

    - when an investor is looking at how much he is willing to pay for a company, and the base interest rate is pretty high, it's relatively less attractive to buy shares in a company or existing bonds issued by a company for the same price that was being asked the day before. That's because the excess of your potential returns from the investment over what you could get from a simple cash deposit or new low risk bond, is not so high as it was earlier.

    So for all those reasons, and some other more subtle ones (including effect on exchange rates and potential exports by US companies etc), generally an increased interest rate is a negative event for markets, not a positive one.

    Of course, in some circumstances like now when the rates have been really really low for ages (to avoid hurting the economy), an uptick in the interest rate is not quite so negative as people might have expected from the above theoretical reasons... because it is a sign that if the central bank are willing to put the rates up and risk slowing the economy, they must think the economy is generally doing pretty well to be able to 'handle' that rate rise, so that's generally a positive vibe.

    When the markets think there is a potential for something to happen at a forthcoming Fed announcement (like in interest rate will increase, decrease, or stay the same) the market prices will reflect the best guess of what would happen.

    So if it's believed likely (but not 100% certain) that rates will go up next week, the market will move a lot closer to where it would end up in the case of the rates announcement being 'rate rise' than where it would end up if the announcement would be 'rates on hold' or 'rates going down'. Most of the expected movement is 'priced in'. Then when the actual announcement is made, and it's what everyone was expecting anyway, the market won't move too much, it will just move the little extra bit to its final position, because it had already moved nearly all the way.

    So, if you and the media and the investors around the world nearly all think that there is going to be a rate rise next week, which would have caused a small market drop, then the share prices will already move close to where investors think they will end up - for example on 10 March the US indexes are already a percent or so below where they ended on 1 March. So may not be much more of a move.

    The other aspect for you as a UK investor is that the pound to dollar exchange rate is affected by difference in interest rates between the countries and expectations for the future interest rates movements. If the dollar interest rate is higher than the pound interest rate, investors around the world would find it relatively more attractive to buy US dollars and hold them with US banks, or to buy US government bonds and so on, than to hold pounds. So they will sell pounds and buy dollars, or borrow pounds to invest in dollars. That change in the supply and demand for dollars will make dollars more expensive to buy, in terms of how many pounds you have to pay for a dollar.

    So as a US rate rise gradually becomes more likely, or closer to happening, and then actually happens, dollars start to cost more pounds (be worth more pounds). So your Microsoft share which sells on the stock market for $65 is worth more pounds to a UK investor with a strong dollar than if $65 was worth fewer pounds. Since a US rate rise started to sound more likely over the last couple of weeks (together with other negative effects on the pound like Brexit getting closer), the dollar has gone from being worth 80p two weeks ago to 82p today. If the interest rate rise does indeed go ahead it will potentially make the dollar worth even more pence.

    So, the US market could fall a little bit (because most but not all the interest rate rise is priced into the US stock market level at the moment) but dollars could be worth more pounds (because most but not all of the exchange rate change is priced into the currency market level at the moment) - and then the net effect of the change in the value of your US shares, when translated to pounds, would be pretty much nothing.

    Taken at face value though, your question 'would a US rate rise push the US stock market to an all time high' the answer is probably 'no, you have got that backwards'. Because the effect of an interest rate rise is (usually) to dampen down the profitability and attractiveness of the companies in the market, not increase them - as per the first few paragraphs above.
    Originally posted by bowlhead99
    this is nonsense. rates movign higher are positively correlated with higher stock prices. theres no simple rule. but i would rather bet stocks move higher with rising rates then the other way around.
    • bowlhead99
    • By bowlhead99 16th Mar 17, 12:56 PM
    • 6,164 Posts
    • 10,860 Thanks
    bowlhead99
    this is nonsense. rates movign higher are positively correlated with higher stock prices. theres no simple rule. but i would rather bet stocks move higher with rising rates then the other way around.
    Originally posted by economic
    You are mistaking "positive correlations" with cause and effect.

    Yes, rates being higher are probably positively correlated with high markets. But that is because if the economy is booming, the US Fed over there or the BoE over here will look to increase interest rates, to take the heat out of the economy and slow it down and get back to more measured growth and inflation rather than a huge unsustainable boom before a bust.

    That technique generally works for the reasons outlined in my post. It is called monetary policy. When the economy and markets were on the floor in 2009, the major governments dropped rates massively and did some QE to prop the economy up. The semi permanent low rates did a good job of increasing markets and economic output significantly. The idea that shares should become more valuable with rising rates (and the consequently higher-yielding cash and low risk assets) is the opposite of what you would classically expect to happen. That's why they lowered rates and did QE when the markets were at rock bottom, causing the markets to rise from rock bottom.

    Of course, in times of high markets the interest rates can usually be quite high. But it is not because high interest rates by themselves cause high markets - really it is the opposite reason, that the government or central bank wants to limit the roaring economy. It is because the high markets are an indicator that companies are profitable and employment is getting higher ; and implies the economy can sustain the higher interest rates which are being used to dampen the economy and curtail inflation etc without causing a depression and stagnation /contraction of the economy.

    So when markets are high you might see high rates, but you wouldn't say the markets are really high *because* of the high rates, the markets are simply high *in spite of* them.

    As I mentioned in the middle of my post, there are some cases where an increase in rates can be a positive sign, which is counterintuitive (i.e. not what you would classically expect), because it indicates the central bank is happy with the progress it has made on fixing the economy and it is seeing the green shoots of recovery as a result of having held rates so low for so long. So perversely, stopping QE and ticking up the US interest rates by small amounts were both received well by the markets. But it is a fine balancing act, because an increase in interest rates is a generally negative thing for markets and you can't afford to put the rates up too high too fast.

    There was a upwards spike yesterday in the US indexes after the announcement as markets digested the small uptick in rates in the context of very positive statements about the US economy (subject to the timing and substance of trump tax policy actually happening) and the fact that there will likely only be a couple more small up ticks this year rather than another three (which would have been worse from the markets' perspectives).

    Perhaps you are right that "there is no simple rule" because economics is more complex than you would typically be able to summarise in a few bullets on a forum aimed at non-economists. Which is why we shouldn't have public referendums about matters of economic policy (I digress...). Still, the commonly accepted points about the broad principles of how markets work can usefully be shared to help people understand the world.

    It's rather less useful (IMHO) to say "bowlhead your comments are nonsense, markets and the economy do what they want and nobody understands it, I'm gambling that markets go up when rates go up rather than when rates go down although most of my financial education has come from my short career in the city over a long bull market where global base rates were at their lowest for hundreds of years".
    Last edited by bowlhead99; 16-03-2017 at 2:31 PM.
    • JohnRo
    • By JohnRo 16th Mar 17, 1:45 PM
    • 2,246 Posts
    • 1,984 Thanks
    JohnRo
    They banks did QE to prop the banks up, it's a matter of considerable debate that the economy proper, as opposed to the casino, needed anything.

    I know the system was jammed because the banks didn't trust each other but in an alternate universe the central crime syndicate could have used the QE cash to smooth over the transition while criminal bankers went to prison and their organisations were dismantled in an orderly fashion.
    'We can't solve problems by using the same kind of thinking we used when we created them.' ― Albert Einstein
    'Facts do not cease to exist because they are ignored.' ― Aldous Huxley
    • talexuser
    • By talexuser 17th Mar 17, 11:40 AM
    • 2,166 Posts
    • 1,643 Thanks
    talexuser
    Interesting that Iceland has just removed all restrictions on money movements. They let their banks go bust, took the hit for a couple of years, then got back to growth. Difficult to compare with a huge economy, but maybe we could have just let the casinos go bust, run the retail banks normally, defaulted a lot of debt for the gamblers who owned it, had a few years of recession and might be better off by now back to normal market forces.
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