Last week, the Bank of Japan added to its monetary easing arsenal by becoming the latest country to enact negative interest rates. Investors and savers in Nordic countries have already become familiar with negative interest. Just ask the Danes and the Swedes.
The problem with negative interest rates is that, in addition to punishing savers, central banks that engage in such a move are seen as desperate and out of ideas for effective monetary. Additionally, negative interest rates are no guarantee of equity market success. For instance, look at the iShares MSCI Sweden Index (ETF) EWD. Down 9.6 percent year-to-date, the lone Sweden exchange-traded fund is lagging the iShares S&P Europe 350 Index (ETF) IEV by 150 basis points.
Sweden: An Exemplar
Perhaps due to the ineffectiveness of negative interest rates, Sweden's Riksbank, the world's oldest central bank, is looking to intervene in currency markets in a bid to weaken the krona. The Guggenheim CurrencyShares Swedish /b> FXS is down 3.7 percent over the past year, but that is not enough for inflation-starved Sweden.
How this gambit will affect EWD and Swedish stocks remains to be seen, but currency interventions typically deliver specious results. Working in Riksbank's favor is that it is easier to weaken a currency than to strengthen it.
Riksbank has a benchmark lending rate of -0.35 percent, indicating it is close to running out of tools with which to prop up the Nordic region's largest economy.
“But the Riksbank is fighting against market views that the krona should be valued at a level stronger than policy makers want, making their goal that much harder to achieve,” reported Bloomberg.
The Role Of Interest Rates
For those that believe high interest rates and strong currencies are positives for financial services stocks, it is easy to understand EWD's vulnerability to Riksbank policy, because the ETF devotes 32.2 percent of its weight to financial services stocks. Conversely, the ETF is levered to the weak krona theme with a combined weight in excess of 38 percent to industrial and consumer discretionary stocks.
Riksbank “s trying to drive down the krona to boost inflation to its 2 percent target, from the current level of 0.1 percent. The Riksbank has already unleashed record monetary stimulus, including cutting rates to minus 0.35 percent – and it’s still not enough,” according to Bloomberg.
Image Credit: Public Domain© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Comments
Trade confidently with insights and alerts from analyst ratings, free reports and breaking news that affects the stocks you care about.
