A strong U.S. dollar, market volatility and higher yields for long-term bonds indicate a normalization of markets
By Kate Ayers
Current market conditions are not a sign of trouble, the Canadian central bank says.
Long-term bond yields are rising, and equity markets are returning to a normal level of volatility. The booming American economy is strengthening the U.S. dollar, Stephen Poloz, Bank of Canada’s governor, said in a Reuters article yesterday.
“These characteristics do not point to a gloomy economic outlook by any means – rather, they are welcome symptoms of normalization,” Poloz said in his speech in London, England yesterday.
The global economy is operating near capacity and will likely moderate slightly over the next year or two, he told reporters.
Bank of Canada’s interest rate hikes are needed, Poloz said. Over the last 15 months, the bank has raised rates five times, the article said. These rates have been near zero since the Great Recession in 2008 to 2009.
“Our assessment is that we’re normalizing at exactly the right pace,” Polos said.
Long-term bond yields are starting to rise as stimulus is removed, he noted. This increase could indicate that the “market is two-sided again” as central banks introduce interest rate risk into the marketplace again, the article said.
As rates increase and liquidity becomes more expensive, “it is only natural to expect more volatility in stock prices as this support is removed,” Poloz said.
“If investors are coming round to the view that expected earnings … need to be discounted by higher interest rates, it naturally lowers the price they are prepared to pay for a given stock.”
However, this situation could lighten if U.S. and China resolve their trade disputes.
“I say tensions but that it a bit of a polite word when they are using live ammo,” Poloz said.
“If that gets resolved, that will be a massive injection of good will.”
Devon Yu/iStock/Getty Images Plus photo