On Wednesday, local equities fell deeper into the bear market territory, thanks to the growing fears among investors over rising rates of interest, as well as the effects of these increases on the global economy. These increased interest rates are required to tackle the rising inflation, which has affected various nations across the far reaches of the globe.
The Philippine Stock Exchange Index shed 2.33% to close at 5,879.68. The broader All Shares index reduced by 2.12% and mining and oil shares also dropped significantly, as well as all sub-indices. As the fears of climbing interest rates and global recessions affect investors’ decisions, Philippine shares keep falling significantly. Other regional indices have also promised a prolonged drop in their investment values.
As a result, it is important to assess how inflation affects the markets. After all, inflation is often followed by an increase in the interest rate, which ensures that investors become reluctant to dabble in risky investments. This ensures that the stock market experiences a downward trend.
There will be a new worry of concern if the 5,400 level breaks. After all, this will result in a gap fill at 4800s levels. Indeed, foreign investors put up over 588 million pesos more shares for sale than they purchased in the local stock market. On Wednesday, more than 815 million stocks, which are valued at 6.79 billion pesos were exchanged.
How can rising interest rates affect the market?
The Philippines Central Bank has increased the interest rate to tackle the rising inflation. It is only natural that these interest rate hikes affect the decisions of investors, whose actions impact the market. How does this really happen? This section will explain more.
Borrowing Becomes More Expensive
When there is inflation, it implies that there is excess money in circulation, making the economy too strong. To tackle this, the interest rate is increased. However, it is worth pointing out that the Fed’s key policy rate only affects overnight lending between banks. As a result, this has no impact on customers borrowing money directly. However, this eventually affects these consumers since the increased rate impacts the rates that affect the borrowers directly.
Deposits produce more
The higher costs of borrowing also impact banks. After all, they take loans from savers as deposits. Simply put, the savings account, which can be profitable, will eventually produce more.
Stocks and bonds are negatively affected
The bear market in bonds can be easily accelerated when there is a sell-off in government debt. It must be stressed that bond yields move in the opposite direction to their prices. Thanks to the fact that yields are related to the federal funds rate, monetary tightening translates to a bond rout, especially when hugely valuable government bonds have been bid up that they start trading with negative yields.
When it comes to the impact of the federal funds rate on equity prices, the relationship can be less direct. As increased interest rate only means that borrowing and spending are discouraged, the impact they can have on businesses’ profit margins cannot be ignored. This is especially true in industries that rely on smart customer spending. As the interest rates become higher, companies find it more difficult to borrow money. This means that hiring, capital investment, acquisitions, and stock repurchases might be adversely affected.
Conclusion
There are many events across the globe that have triggered rising inflation, whose effects on an economy cannot be ignored. To tackle this, governments increase interest rates to ensure that borrowing and spending by consumers become more difficult. This has impacted the behaviour of investors, especially in the Philippines, which has also produced an effect on the stock market. As inflation and rising interest rates threaten to make borrowing more expensive, higher unemployment rates might threaten to plunge the country into the bear market.
