There’s a lot of negativity in global financial markets and a distinct sense of panic at the moment. It seems that US Federal Reserve Chair Janet Yellen’s comments last week that “the US Fed was taking a close look at negative interest rates” (yes cutting US rates, not lifting them) in response to financial market volatility are reverberating through markets. That’s not to mention another crash in the oil price to just over $26 a barrel.
Risk-averse, defensive plays or flight to quality trading is the flavour at the moment with equity, commodity and credit markets all savaged last week while government bond yields were bought with a vengeance, yields falling to 12-month lows.
While global growth concerns are front and centre, the failure of central banks to stabilise sentiment signals that monetary policy is losing its traction. Following the Bank of Japan’s move a week earlier, Sweden’s Riskbank cut rates to -0.50% while the European Central Bank is still talking of more easing. Financial markets have now all but ruled out another rate rise by the US Federal Reserve any time soon (a complete reversal of sentiment a month ago where US rates were going up).
Locally, markets still have one further RBA rate cut factored in by July/August (refer chart below) but this could change quickly should this market turmoil continue.
Implied RBA cash rate from interbank futures