Asian markets are sharply lower this morning, with the Nikkei in Tokyo closing down 3.9% and the Hang Seng down 3.5%. That follows the lead set in the US last night, where the Dow Jones fell by 3.1%, and the Nasdaq ended 4.1% lower. Traders appear to be concerned about company forecasts in the upcoming round of financial results - however interest rate increases are also having a massive impact.
"Where the States is in terms of interest rates and the economic cycle is coming in to vogue now," said John Finn, managing director of Treasury Solutions. "The US has been running really well for a number of years, interest rates have been rising and there'll be another hike in December. Market estimates then vary between two and four hikes next year," he said.
"As you're coming to the top of a cycle it usually suggests that the economy is beginning to top out also - and I think markets are beginning to look out into 2019 and 2020 and the possibility that the States is going to slow down," John Finn added.
At the same time the eurozone is also on a path towards rising interest rates - with quantitative easing coming to an end in December and the prospect of a first rate increase in the second half of 2019. "That means that you've a narrowing of interest rates in the two places," Mr Finn said.
That also means that businesses - and consumers - may need to start preparing themselves for the prospect of higher interest rates in the relatively near future. This is particularly important for mortgage customers, as fixed mortgage rates are likely to rise well in advance of any action by the European Central Bank. "For those who are not on trackers, fixed rates are in some cases lower than variable rates, which makes them very attractive," he said. "If I was someone who had a standard variable rate mortgage I'd begin to look at this quite seriously."
Another grouping affected by an interest rate rise is the Government, although it could benefit if it can lock in long-term borrowing before rates begin to tick up.
Elsewhere the euro has weakened considerably against the dollar and sterling in recent weeks, which Mr Finn feels is being caused by increased optimism around the prospect of a Brexit deal. "If a deal is done it's good for sterling because it reduces the uncertainty," he said. "We've seen sterling come back from almost 91 pence in August to 87.4 pence yesterday. To put that into perspective, someone selling £1m of sales into the UK would be £43,000 in profit better today than they would have been six weeks ago," he said.
John Finn said that should a withdrawal deal be struck in the coming weeks that trend towards stronger sterling should continue. But he added that this does not mean the currency is out of the woods completely as an agreement may also fall at the hurdle of parliamentary approval.
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