This is major news. German interest rates on Treasuries (Bunds) are reversing their long term trend. Make no mistake, this can become very impactful for many other markets, a phenomenon we tend to call intermarket dynamics.
As always, financial media have no clue on the really important news. Reuters, for instance, came out yesterday with the news that low interest rates in Germany can be the cause of a systemic risk. Today, that same Reuters talks about ECB rate hikes, which, obviously, will send German rates higher as well.
And, of course, if German rates are going higher, banking stocks in Germany will go higher as well, as opposed to what this article reports.
As seen on the chart German rates are creating a pattern not seen in the last 9 years.
The long term chart of German rates shows a long falling channel. Rates dropped to below zero last summer, at the depth of the Brexit crisis. In 2017, however, rates started to move outside the falling channel. Since then, this longer term consolidation pattern has been forming on the chart outside the channel.
Interest rates are the core of the financial system. If their long term trend reverses investors better pay attention.
The impact of this on other markets (spillover effect which we call intermarket dynamics) can be huge. For sure, German Treasuries (Bunds) will fall. It should be good for the Euro and German banking stocks.
Most likely, Germany, being the driver in the Eurozone, will influence several other European markets to follow the same trends.
We should see increased risk taking in stock markets in general. However, the big unkonwn is how exactly rising rates will impact stocks. As explained in Disruption Ahead In Stock And Bond Markets a interest rate trend reveral could have negative effects on stocks. That is because the paradigm in markets could change as rates have been falling for many decades … so structurally rising rates could bring many unforeseen effects.
Watch closely what happens in German markets, in the next couple of weeks and months. It could be extraordinary!
