Investment

Negative interest rates could now be coming to Canada

Published

5 years ago

March 15, 2020

A reader sent in a very relevant question last week: “If we head towards negative interest rates like some parts of the world, where does one invest their money to earn a decent return?”

We may be closer to this scenario than most people think. The entire U.S. Treasury bond yield curve dropped below 1 per cent last week for the first time in history.

On Sunday, the U.S. Federal Reserve slashed rates back to near zero, restarted bond buying and launched other measures. This followed the Bank of Canada last week announcing its second half point cut this month, to 0.75 per cent, saying: “It is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy. In addition, lower prices for oil will weigh heavily on the economy, particularly in energy intensive regions.”

All this raises the spectre of negative interest rates here.

We’ve already seen them for some time in continental Europe and Japan. Now the U.K. has joined the club, with yields on two- and five-year government bonds (called gilts) dropping below zero on March 9.

According to a recent report from Bloomberg, almost US$15 trillion worth of investment grade debt, more than a quarter of the global total, is in negative territory, including all of Germany’s government bonds.

This means that investors who buy now will get less money back than they invested when the bonds mature.

Why would anyone do that? Fear. These people are telling the world they expect stocks, real estate, and all other assets to lose significant value in the years ahead. They would rather commit to a small loss over time than run the risk of catastrophic losses in other assets.

The big question is whether negative rates actually work to stimulate an economy. The jury is still out on that, even after several years of living with them. The Wall Street Journal reported in December that senior monetary policy staff at the European Central Bank (ECB) published a paper saying the benefits for the economy outweighed any damage from below-zero rates. These included lower borrowing rates and increased inflation.

The team that prepared the report was led by Massimo Rostagno, head of the ECB’s monetary policy division. It concluded that negative rates encouraged commercial banks to lend and invest capital, rather than pay to leave money on deposit at the central bank.

The downside of negative rates is that they squeeze bank profits, forcing them to jack up fees on their other services to the detriment of their clients. That’s not all. Pension plans, which have large bond holdings, will be hard-pressed to meet future obligations if their fixed income assets generate negative returns for a lengthy period of time. Insurance companies would also face problems, for the same reason.

Another negative effect of negative rates would likely be to exacerbate the housing bubble that is already making home ownership a distant dream for young people. Zero or negative mortgage rates would send house prices soaring.

The effects on the stock market are debatable. Some analysts believe negative rates would drive up stock values, especially those of dividend-paying securities. Others see negative rates as a depressant because they signal worse times ahead. European and Japanese markets have not been stellar performers in recent years, but they held up reasonably well until the recent sell-off.

In short, we’re moving into new territory and no one really can predict the consequences, especially if negative rates become an entrenched part of North American monetary policy for any length of time.

So, to go back to the reader’s question, where do you invest in these circumstances? Bonds, real estate, and gold look like the best choices. If you don’t like any of those, hold cash, even if your account pays zero interest. It’s better than investing for a guaranteed loss.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

Published

3 days ago

November 6, 2024

Anne Joseph

NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

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Investment

S&P/TSX composite up more than 100 points, U.S. stock markets mixed

Published

3 weeks ago

October 16, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

Published

4 weeks ago

October 11, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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