Thursday, 12 November 2015

Negative interest rates loom

Markets were mixed again on Wednesday.

The STOXX Europe 600 rose 0.7 percent while the Shanghai Composite Index gained 0.2 percent.

However, the S&P 500 fell 0.3 percent.

Oil, gold and the US dollar all fell on Wednesday.

Euro-area government bonds rose, pushing German two-year note yields to a record low, as investors increasingly see a likelihood of additional European Central Bank monetary stimulus.

Indeed, the trend towards even lower rates may persist. From Bloomberg:

“There’s a very real chance unorthodoxy becomes the new orthodoxy,” said Alan Ruskin, global head of Group-of-10 currency strategy at Deutsche Bank AG in New York.

While financial markets are focused on the Federal Reserve’s looming rate increase, policy makers and economists are already changing their attitude toward negative rates.

European Central Bank President Mario Draghi is open to reducing the rate he charges banks to leave money in his coffers overnight further into negative territory. Bank of England Governor Mark Carney has also revised his thinking to say the U.K. benchmark could fall below 0.5 percent if needed having previously worried deeper cuts would roil money markets.

Meantime, Fed Chair Janet Yellen said last week that “if circumstances were to change” then “potentially anything, including negative interest rates, would be on the table.” One of her policy-setting colleagues has already advocated them for next year.

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