Breaking news: Bank of England head Mark Carney just strongly hinted that additional QE or interest rate cuts could be coming this summer in that country. The news is causing the British pound to drop sharply, and U.K. 10-year yields to crash to fresh all-time lows (see chart).
Stock markets initially popped on the news. But is this REALLY bullish? That yet another country’s interest rates are plunging, and that yet another country could end up in the NIRP/ZIRP Twilight Zone? That’s the $100 million question. Let’s face it. The interest rate markets are linked globally. This is just the kind of news that could collapse yield spreads even more, and potentially send U.S. yields to fresh all-time lows at the long end of the curve. That, in turn, would put even more pressure on bank earnings at a time when Euro-banks are reeling.
My advice: Watch how things sort out here, and keep a close eye on bank stocks. Low interest rates used to be a stimulus for markets and the economy. But they’re increasingly turning into the exact opposite.
