What Are Negative Rates Doing to the Stock Market?

When banks employ a looser monetary policy the result is a rally for the stock market, but according to a Morgan Chase JPM analyst the continuation of measures into negative interest territory might cause the opposite to occur.

In its report, the bank compared how negative rates have impacted the stock market in countries who have employed them. It found that they all suffered market losses since the introduction of NIRP. For example, Swiss stocks went down by 9.0%, Japanese stocks headed lower by 6.7% and eurozone Equities Equities Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling pa Equities can be characterized as stocks or shares in a company that investors can buy or sell. When you buy a stock, you are in essence buying an equity, becoming a partial owner of shares in a specific company or fund.However, equities do not pay a fixed interest rate, and as such are not considered guaranteed income. As such, equity markets are often associated with risk.When a company issues bonds, it’s taking loans from buyers. When a company offers shares, on the other hand, it’s selling pa Read this Term decreased by 4.6%. The only exceptions are Denmark with an increase of 22.4% and Sweden with an 0.8% increase.

As we can see from the table above, negative rates have been counterproductive for the equities market thus far. Not only that, but it has proven to negatively impact the banks as well, rather then lead to economic growth. NIRP, so far, has only caused more damage.

The whole idea behind negative rates is to force cheaper lending and increased purchasing. Many economists were against negative rates, stepping on the argument that it only hurts banks' profitability and that it works as a tax on the financial system. With the decreased health of the banks, the fear that NIRP could destroy economic recovery and continue to hold back growth increases.

According to analysts at Bank of America Merril Lynch, by constraining the banking system with NIRP, banks might consider recouping their losses by increasing rates on loans and tightening financial conditions. Which in fact will be counterproductive for the whole easing plan.

According to J.P. Morgan's Clau, Draghi should come up with a way to fight inflation without lowering the profitability of the banks. A good solution for this is another round of cheap loans and a tiered-deposit system in which the excess Liquidity Liquidity The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent The term liquidity refers to the process, speed, and ease of which a given asset or security can be converted into cash. Notably, liquidity surmises a retention in market price, with the most liquid assets representing cash.The most liquid asset of all is cash itself.· In economics, liquidity is defined by how efficiently and quickly an asset can be converted into usable cash without materially affecting its market price. · Nothing is more liquid than cash, while other assets represent Read this Term from banks would be placed with a rate above the deposit rate at the European Central bank.

Clau also added that market participants are becoming more skeptical about the final result of this measures, with the end-game being whether inflation will go up if the ECB succeeds.