The market has yet to see the most significant effects of the cross-Pacific impasse
The most significant impact of the U.S.-China trade war, fuelled by Trumpian rhetoric along with belligerence on both sides of the pond, is yet to come, according to market observers interviewed by CBC News.
This impasse will definitely make itself felt in the global financial system, and will become especially apparent through negative interest rates and inverted bond yields.
Last month, the Bank of Canada decided to retain its interest rate at 1.75% for the sixth straight policy meeting. At the time, Deloitte chief economist Craig Alexander said that the central bank faced minimal pressure from the U.S. Federal Reserve to cut interest rates.
Alexander argued that if anything, a Fed rate cut can even push further U.S. and foreign demand to Canada, along with some beneficial upward pressure on the loonie.
At present, negative yield products are seeing increasing popularity, triggered by a flight from alternative investments – widely seen as unreliable avenues for stability.
Such a trend poses a major risk to the global economy in the long term, Avenue Investment Management partner and portfolio manager Paul Gardner said.
“There’s something around $16 trillion of bonds around the world dealing with negative interest rates,” Gardner explained. “That’s very unhealthy ... just because it has a feel of instability.”
“You always want to have positive interest rates,” he added. “You want low, but you don’t want negative.”
Another strong indicator of trouble ahead is the inversion of yields, which have pulled down long-term costs to much lower levels compared to short-term rates.
However, while some financial think-tanks have warned that this is almost certainly signalling an upcoming recession, R.W. Baird & Co. chief investment strategist Bruce Bittles has a far less alarming explanation: “It’s because interest rates all over the world are plummeting.”
“I don’t think there’s any mystery,” he assured. “The Federal Reserve is going to have to come in and lower rates again, so the bond market is anticipating that.”
