Vice-President, Global Fixed Income, CIBC Asset Management
The Fed elected to cut its overnight rate by a quarter of a percent. The Fed also indicated they'd be more data dependent before the signal that it would cut rates again. This has been very much anticipated being that central bankers across the globe have been highlighting increased risks to a slowdown, be it related to a trade war, be it related to European weakness, be it related to Brexit, be it related to previous rate hikes that have occurred over the past few years. So this is something that was already expected in the market today.
Signals for equity sector
Vice-President, Equities, CIBC Asset Management
For the equity market, we've had about a few months to prepare for this announcement as it was highly anticipated. And generally, it is a very positive move. So interest rates, lower interest rates, have a few different implications on equity markets. So they're very supportive to valuations of risk assets and as well, they're stimulative to economic growth. So the idea is that this quarter point cut will have that effect and we've actually seen that in the lead up. For equities, I think the big thing to watch will be whether this rate cut will have any implications on economic growth, whether we can actually stimulate demand and economic growth, because I think you have some different situations if that's not the case. So if we do have growth stabilize and improve, I think there's implications for sectors such as consumer discretionary and autos in particular. We could see sales improve as financing terms for auto purchases improve, you know, sectors like real estate or the REIT sector, which is a highly economic sector but also highly levered, could benefit on both fronts. And then I think you also have further valuation support and improved outlook for companies that are highly levered and generally thought of as cyclicals as well. So the second scenario is that we don't have a re-acceleration of growth at the quarter point cut and any further cuts don't really have an impact on reversing the slowdown that we've seen. In that environment, I think you get a flight to safety and a flight to quality. Gold will do well in that environment, utilities. With regards to financials, the outlook is a bit more mixed. I think in general, lower interest rates are negative on the margins that banks earn on their products. Of course, if we do have a re-acceleration in the economy, that would be supportive to loan growth and potentially a steepening of the curve. So a potential offset to that negative margin. But again, if we don't have that re-acceleration of growth, I think we have the opposite scenario, which could be quite negative for financials.
Fixed income impact
Because these rate cuts have been expected, they have been embedded into our strategies, be it on the duration side, on the sector side. Because rate cuts are deemed stimulative, it's seen as a favorable for corporate profits and ultimately for corporate bonds, which we expect will outperform government bonds over the next twelve months and is consistent with how we position ourselves in our portfolios.