In a rising interest rate environment, the effect is also seen on the stock and bond markets. This is primarily because of the psychology of the consumers and businesses – as and when there is an interest rate hike, both consumers and businesses cut their spending habits to save on the higher interest rate prevailing in the market. This in turn causes earnings to fall and stock prices to drop as some companies are sensitive to interest rate movements. Also, interest rates affect bond prices where they have an inverse relationship i.e. when interest rates rise, bond prices fall and vice versa.
As the demand for lower yield bonds drops it will cause the price to drop. Rising rates also makes the US dollar stronger, for companies in the US, eventually impacting the international revenue and making US products less affordable for foreigners.
In such a case, what reduces the need to pursue high yielding investments in Australian (ASX listed) banks like Big fours, naming, Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corporation (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB), is the rise in interest rate that investors can get an impact from when keeping their money in cash.
This lack in investments may also pull U.S and other investors out of the ASX listed banks or companies. Entities or Companies that buy from or sell to US companies, like the ASX listed banks which borrow a large sum of money from the US, can be hugely impacted if the US growth itself is under the paws of the rise in interest rates. US bond yields have been rising lately signifying that the US economy is improving, and which is seen as a sign that the US central bank may also raise the interest rates soon. The cost of funds for Australian banks could eventually increase who borrow a large amount from the US.
Historically, whenever Australian interest rates are surpassed, and US interest rates have increased, the Australian dollar starts losing value relative to the US dollar because the US market becomes more appealing to the global investors. Banks simply earn from the spread i.e. what they pay for a deposit and what they receive from a loan.
The recent trend as studied by many experts, is indicating that the big four Australian Banks i.e. the Australia and New Zealand Banking Group Ltd (ASX: ANZ), Westpac Banking Corporation (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) may start raising interest rates on all home loans and not just on the investment loans that all banks have started lifting the rate on recently. So to say, protecting the banks’ profit margins might not just revolve around higher interest rates on investment loans but more might be needed and this will drill down to how investors get acclimatized to the changes and are asked to pay for.
Lately, ASX-listed banks post the Royal Commission have recorded moderate gains and would be now key to watch as US Federal Reserve has projected to have more interest rate hikes in the next few months.
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