Why ECBs First Rate Hike in 11 Years is Good

Hello friends. Today as I record this video on Thursday, the European Central Bank the has just announced a 50 basis points or half a percent rate hike. This is the first rate hike after 2011.

In a side note, a much smaller development, though of course, a noticeable one was the South African Central Bank also raised rates by 75 basis points or three quarters of a percentage point. In this video, I want to talk above why this development by the European Central Bank is a good thing.

Small Cap Proxy Players Briefing: Book Your Spot

I'm Vijay Bhambwani. I have been trading these markets since 1986 and through my videos, I want to reach out to my online family and friends and help them get better returns on investments both in their trades as well as their portfolio investments.

So let's dive right in. Before you go, 'What? Have you lost it? You've been saying rising cost of funds is not really good news for equities. And now you're captioning of video saying the European Central Bank raising rates for the first time after 11 years is good news?', now before you flip out, allow me a second and I'll explain to you why I am saying what I'm saying.

You see, so far, the US was raising rates. The Federal Reserve in the United States was raising rates and I explained to you before what the cash carry trade is. If country A is offering 5% interest and country B is offering 10% interest rates, money will flow out of country A because it's giving only 5% and flow into country b, which is giving 10%. This is called the cash carry trade or the cash carry arbitrage, interest rate arbitrage.

I also told you that other countries will also be forced to raise interest rates because they will want the money, which is invested in their country, to remain there and not fly out to the United States. That's finally happening. So my 360 degree world review of the financial markets which lays out a broad, blue print is basically panning out a long expected lines.

Normally what happens is the country that raises interest rates and witnesses foreign inflows sees its currency strengthening because foreign money is coming in, which is what was happening to the US dollar index or the Dixie.

Now the Dixie was rising, which put pressure on other asset classes, particularly emerging markets, in which India is also a part. Now why do emerging markets are suffer a downward pressure when the United States dollar is strong?

Simply because we tend to settle all our international trades, especially purchases of crude oil and natural gas in US dollars. All other factors remaining constant, even if the price of oil and gas does not change in the overseas markets but the dollar becomes stronger, the landed price of those important goods go up. This results in imported inflation.

Now if the US dollar falls, which it is after the announcement of the European Central Bank raising interest rate, there is competition to the US dollar. The euro is beginning to find support against the dollar and attempting to go above parity levels it had fallen to. Parity means one is to one. If the euro starts to strengthen against the dollar, which means the dollar is going down in the global basket of currencies, it will grant relief to the emerging markets pack, including India.

Will it force the euro, the European Central Bank rather, to raise rates in the coming September meeting of its central bank also? There is a good probability it might do so now that they've bitten the bullet and raised rates after 11 long years. There is a good probability that to tame inflation, they will continue to raise rates, which would mean that there will be competition even in the future to the dollar's strength which is good for emerging markets, including India.

What we do need to watch out for is weather the Reserve Bank of India's Monetary Policy Committee or the MPC, which is meeting in the first week of August, also follows suit and raises interest rates or not. That will be a domestic issue.

If you've seen my previous videos, wherein I've talked about why Asia will lead the recovery after the winter of 2022 is done and dusted, once the markets have bottomed out, and the bad news is factored in. I'm presuming there is no other war, earthquake act of man, act of God coming in and disrupting the markets in the future once the dust settles, winter is over, maybe around November-December.

This is why the Asian market will lead the rally. We are like midcaps. We fall hard. We fall fast, but we also bottom out and rise much more faster than the largecap economies, which is a Western Europe and North America.

On this optimistic note, I bid goodbye to you and suggest you stayed patient. Watch the next few months. Wait the next few months out. Remain invested. But don't get too aggressive.

On this optimistic note, I'll bid goodbye to you not before reminding you to click like on this video if you liked what you saw. Subscribe to my YouTube channel, if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here.

Good, bad or ugly, I always look forward to your feedback in the comments section. Also help me reach out to fellow smart investors like yourself by referring my videos to your family and friends.

Thank you for being with me in my video and your patience. Till we meet again in my next, this is Vijay Bhambwani signing off for now. Have a very, very profitable day. Thank you.