Select Page

Upon switching on the computer this morning at DevDosh Ltd towers the first lot of financial news to grace our screens was that the FTSE100 closed up yesterday. It’s the same news that many will see today so we thought it was worth giving readers a little more insight.

Indeed the FTSE 100 did increase in value before close last night. The index increased bumped 1.5% during the course of the days trading. Many pundits seem to think that the market rise is due to more positive sentiment being brought about by a potential interest rate cut to “combat” the Corona situation.

Indeed the U.S. Federal Reserve Bank announced an emergency interest rate of cut of 50 basis points earlier this week. That type of action hasn’t been seen since the GFC in 2008. Jerome Powell, Chairman of the FED said it’s because they saw that the Corona virus was having a material impact on the economic outlook.

The Bank of Canada has cut half a percentage point from their benchmark rate too. That’s the first time their monetary policy has eased in 4 years.

Now the European Central Bank and Bank of England are expected to follow suit. Next week and end of month respectively.

The narrative here is that lower interest rates stimulate the economy. Which on an overall long term basis where everyone is playing fair they do. However there are two major testaments as to why rate cuts may not be the best thing for the common man in this instance. Firstly the banks have been retaining the benefit of stimulus packages in recent years. Secondly, the whole point about pandemic economy crashes is that consumers disengage. On that basis, who are they stimulating? A consumer who may get half a percent off their credit card bill when they buy something off Amazon which won’t be delivered because the driver wont come to work because he is worried about getting ill? No, they are stimulating the markets

As a consumer these types of cuts don’t make a whole hill of beans. If your mortgage or credit cards are fixed rate it won’t make a dent at all, and if you are variable rate then you may see a small impact. Of course the impact will hit your savings too so swings and roundabouts there depending on how your finances are set up.

For the markets which are highly leveraged right now however it makes a big difference. If you are a trader managing £10m at 10 times leverage then your £100m margin finance cost just dropped by half a million pounds. That is stimulus.

You have to look no further than the FTSE100 buying pattern from yesterday to bear this theory out. The market rose on the news that there may be a UK interest rate cut. If the rate cut was truly designed to boost the economy and help everyone then in the future stock value should go up across the board – right?

Well in that case why didn’t investors put their money into a mixed basket of equities. What they actually did was run to classic defensive stocks – health care, utilities, telecoms. The type of stock that retain/increase in value during economic downturns.

DevDosh Ltd, for the safest 10% yield in the current fixed income investment market, contact us today.