Confluence of events – Part 2

There is however another concerning set of global circumstances that are coming into play in Europe and Japan. This is the spectre of negative interest rates and its potential to accelerate deflation rather than promote an inflationary environment.

The European financial system and particularly the banks are feeling the pinch from the ECBs (European Central Bank’s) experiment on negative interest rates. Please watch the Eurozone carefully in upcoming months, as negative interest rates could achieve the exact opposite of what the ECB is trying to achieve. The present negative interest rate environment could be extremely deflationary. Why?

It would seem that lenders, in an attempt to pass on the impact of negative interest rates, are taking the unimaginable steps of requiring corporate clients to pay interest on deposits and that the European banks are even storing cash in vaults in an attempt to avoid charges from the ECB. Since the ECB cut the deposit rate the cost of insuring the EU banks against a potential default has more than doubled.

With all of this in mind, keep watch for the following dates:

– 3 June (US time) US May jobs figures are released,
– 7 June RBA decision on interest rates (a cut impacting the AUD)
– 15 June (US time) US FED rates decision
– 23 June BREXIT referendum in the UK.

So strap yourselves in for June as it is our view that regardless of the decisions above we should all see significant volatility which can also mean potential opportunity for the astute investor.

Article Written by Scott MacRae – Director, Gold Bullion Australia