Interest Rate Hike Causes Volatility in Stock Market, Investor Brace for Uncertainty

Increasing inflation has pushed governments and respective central banks to the brink. In the better part of 2022, most were in a bullish mood to hike interest rates to lower inflation. The risk of this action reduces financial stability in the global security market.

Geo-financial stability is at risk because decades of reforms and solutions to steady the global financial market have destabilized almost at a whim because of the after-effects of Covid. Indeed, both the advanced and the developing economies still face a tumultuous financial market in 2023, investors, in the interest rates vs. stock market debate or other tradable commodities should brace for tougher times ahead.

Impact of increasing Rates

Every stakeholder in the financial market feels the heat of destabilized financial markets. At the top of the chain are governments, who initially had to contend with increasing debt. Parties like insurers, hedge and pension fund managers are also stressed due to stretched balance sheets.

The stock market as a whole has taken a tumble. Volatility has pushed people to other areas, meaning that assets are hard to trade in the primary markets, making the stock market less lucrative.

Vulnerable markets occasioned by increased interest rates coupled with poor liquidity in the open markets are a recipe for things to get worse in the coming months.

Global patterns

The prevailing financial situation has created a new pattern in the global markets. Investors have dropped their bullish behavior that dominated the market in 2021 when most indices beat their previous year’s closing highs. Investors are now conservative and are careful where they are putting their money.

The reason for the change is the now expensive loans, and the increased cost of borrowing that has slashed returns. A noticeable fact is the increased bond yields, and countries having to spend more for loans.

The Property Industry

The property industry cuts across many sectors. Any negative tilt can spill over into banks and the micro-economy at large. The housing market has felt the brunt of the faltering economy towards the end of 2022 and 2023 will not be different. Many borrowers are facing the risk of higher interest rates that may make owning a home a far-fetched dream. Valuation of new homes could consider the prevailing financial situation, making the housing industry less attractive in the shortest term.

Developing economies are also on the receiving end of the actions taken by developed markets, which is to lower their aid and developing budgets abroad. The economies also face high inflation and are not spared by the increased costs of borrowing—money usually supplied by advanced economies. Their property market will also be less attractive due to the high cost of production, and the tight squeeze people are facing when buying essential goods and services.

Investors amid the financial turbulence are taking a cautious approach before buying any new asset. Most understand that large emerging markets have the resilience to ward through the uncertainties that exist now and into the future. However, the smaller markets will need some external restructuring and help to keep up with the prevailing market conditions.

While the larger economies are still going and not as affected as the emerging markets—investors are still wary of the trend of higher rates early on in the year. However, some positives include the liquidity buffers that banks in the biggest markets still enjoy. The positives will continue to prevail if the central banks can slow down in their attempts to lower inflation. If the trends continue, then the banks might not be able to handle sustained inflation in the better part of 2023