Update Equities: All eyes on interest rates
After last Friday’s disappointing US labour market data, interest rates fell both in the US and in Europe this week. Bond yields slightly picked up after the publication of US inflation figures on Wednesday, but this did not seem to reverse the trend.
Although the impact of rate fluctuations is mostly associated with the bond market, the effects of changing interest rates are felt in equity markets as well. The prospect of policy rate moves by central banks caused equity investors this week to focus more on a number of specific sectors.
Shares in real estate and utility companies, which benefit from declining interest rates, rose – notably in the US. Companies in both sectors reward shareholders with above-average dividends. A lower-rate environment increases the appeal of shares in such companies. In addition, real estate companies can benefit from lower interest payments on investments when rates drop.
Another interest-related topic hit the financial sector in the past few days. JPMorgan was negatively impacted by comments of one of the bank’s highest executives, warning that analysts are too optimistic about next year’s expected net interest income. Together with a statement of the CEO of Goldman Sachs, that trading revenue is expected to drop by 10% in the third quarter, the JPMorgan comment negatively impacted the performance of the US banking sector this week.
In Europe, German car manufacturers came under pressure. On Tuesday, BMW sent out a profit warning, citing increased competition from Chinese car makers, disappointing margins and a recall of about 1.5 million cars over a braking problem. Shares in Volkswagen also dropped, after the company announced it is considering the closure of several German production plants. This year, the auto & auto parts industry has been one of the worst performing subsectors in European equity markets.