Implications of interest rates on share market?

[Tyler Durden]

So the RBA reduced the interest rate again today.

Everytime there is discussion on this topic in the paper, it revolves around how much it will save people with home loans. I also see that it reduces the amount of interest earned on money kept in banks.

But what, if any, effect does an interest rate change have on the market? From a newbie point of view, the interest a bank will pay me now will be about 5.5%, so any returns I seek from the market will have to be above that to compensate me for the risk.

 

[Trader101]

Re: Implications of interest rate on share market?

So the RBA reduced the interest rate again today.

Everytime there is discussion on this topic in the paper, it revolves around how much it will save people with home loans. I also see that it reduces the amount of interest earned on money kept in banks.

But what, if any, effect does an interest rate change have on the market? From a newbie point of view, the interest a bank will pay me now will be about 5.5%, so any returns I seek from the market will have to be above that to compensate me for the risk.

From an pure equity point of view lower interest rate is good for stock prices, it both lowers the cost of borrowing for companies and leads to(increase in profit, lower interest rate also stimulate more demand and will benfit revenue.

However, central bank only lowers interest rate when the outlook for the economy is turning bearish therefore while a cut in interest in it self is good for equity market it is usually done in a context of a slowing economy which is negative for equity

 

[waimate01]

Re: Implications of interest rate on share market?

So the RBA reduced the interest rate again today.

Everytime there is discussion on this topic in the paper, it revolves around how much it will save people with home loans. I also see that it reduces the amount of interest earned on money kept in banks.

But what, if any, effect does an interest rate change have on the market? From a newbie point of view, the interest a bank will pay me now will be about 5.5%, so any returns I seek from the market will have to be above that to compensate me for the risk.

Under 'normal' circumstances, a reduced interest rate makes dividend yield seem more attractive, thus money flows to equities and prices go up. But I wonder to what extent that will happen this time. It seems to me a lot of people are sitting in cash for reasons of safety rather than yield, and I'm not sure 0.25% is sufficient justification to coax people back into the wild fluctuations the market offers at the moment.

 

[joea]

Re: Implications of interest rate on share market?

Under 'normal' circumstances, a reduced interest rate makes dividend yield seem more attractive, thus money flows to equities and prices go up. But I wonder to what extent that will happen this time. It seems to me a lot of people are sitting in cash for reasons of safety rather than yield, and I'm not sure 0.25% is sufficient justification to coax people back into the wild fluctuations the market offers at the moment.

Hi.
Blind Freddy understands there is another interest reduction to come.
But Wayne Swan & the RBA are playing games.
The banks announced that it was possible, that all, may not be passed on. This was to induce the RBA to drop it 0.5%. So if that had happened the banks may have with held 0.2 - 0.25%. So now the RBA is announcing it over two month periods, to try and force the banks to pass it all on.
Now if the banks are not sure that there is another reduction, then it stands to reason they may hold some of the current reduction till February and see what happens then.
Talk about "cat and mouse".
I will bet on "the banks put it over Swan."
joea

 

[young-gun]

Re: Implications of interest rate on share market?

There has been so much faith put into this European summit(seems like the sixth or seventh one for the year). The market will be delighted with the 'apparent' good news that will surely come out of this summit, for about a week, and then crash again, at which point id say glen stevens will be calling from bora bora with an emergency cut before the new year(if they are able to cut outside of monthly meetings, i cant recall how it worked in 09).

in this current market i think rate cuts would be viewed as a negative as the cuts are a result of the very poor health of the global economy. you would like to think investors would realise this.

 

[Starcraftmazter]

Re: Implications of interest rate on share market?

They can call an emergency meeting to cut - but whether the banks will pass it on, is another matter.

 

[Wysiwyg]

The major U.S. Indices have multiplied threefold since the crash end in 2009 yet Interest Rates are still at all time lows. Surely businesses are doing well if investors are buying them for income and growth. It seems this whole monetary policy act predominantly benefits the larger money pots. The rich get richer defining capitalism. Come rising interest rates money should flow into fixed income and cash investments and markets decline?

 

[investtrader]

Well that is a very simplistic summary and is correct in the fullness of time. But US rates are starting at a very low level. And long term US bonds seem very dangerous at this point. You can get any number of macro opinions on what may happen - best to just watch the charts.

 

[Smurf1976]

To quote a financial commentator (can't remember who) who was discussing interest rates some time ago "the Fed keeps raising rates until something breaks".

Historically that seems to have been the case and I see no reason why this time would be different. A rate raising cycle starts, rates raise periodically and then something breaks. Then we see falling rates as the fix.