Negative Interest Rates: Coming to Australia — Big Banks in Trouble

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RBA Negative Interest Rates Coming to Australia

Mr Market may be about to enter a flat period. That’s going off no more than my gut right now.

We’ve had a nice little rally based off iron ore and gold staying strong.

But there isn’t a heap more to get excited about either — unless they go to another level again.

We’ve had the relief rally too.

It’s one thing to ‘look past’ the disruption to earnings in FY20 and 21.

But there’s only so far prices can run on that alone. Companies are in the business of making money.

Suffice to say; I can’t say I have a huge urge to get long this market.

I still think another mini panic might happen too…

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Two potential ‘spook factors’

I’m not too sure what to give further weight: the deteriorating trade relationship between Australia and China, or the spook factor of negative interest rates.

But we’re not going to have negative rates here! That’s what RBA governor Señor Lowe seems to tell everyone. It may not matter.

Over in the UK, yields on three-year government bonds have gone negative for the first time.

The Old Lady of Threadneedle Street — the Bank of England — is saying that they may take the cash rate negative too.

According to The Wall Street Journal

When rates go negative, central banks charge commercial banks to hold deposits rather than pay them interest, spurring them to lend more.

That’s the theory. It’s total garbage, of course.

Listen instead to the words of an actual banker, as quoted by the Financial Times

Negative rates would further suppress bank profitability at the very time their balance sheets are supposed to act as a shock absorber for tens or even hundreds of billions in potential credit losses.

OK, that’s over in the UK, you might say.

Well you better pay attention, because if the same dynamic comes here, you can expect the banks here to be in all sorts.

The RBA seem genuine in their desire not to see negative rates here. However, Australia doesn’t exist in a vacuum.

Foreign money would come in to buy up the bonds with positive yields and drive them down anyway, and send the Aussie dollar up too.

I cannot say with confidence where all this goes. All I can say is that bank shares make up 20% of the ASX.

And they don’t like negative rates. So I’m not so hot on the idea of putting my money into either…

Look to this sector for potential trades

That’s not to say you can’t get decent trades in individual stocks away from the financial sector.

We know iron ore and gold stocks are minting money. Opportunity will continue to abound here.

One idea on that is to look for merger and acquisition activity in the gold sector.

Australian gold prices have been high for a long time now.

That means the big gold stocks have lots of cash on their balance sheets to go shopping.

Don’t forget that mines are wasting assets.

So the onus is always on producers to replace their reserves.

They can do this through exploration or buying an existing project.

It’s not unreasonable to go looking for gold stocks with assets either in, or close to, production that might appeal to a bigger player.

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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