[Beginner's Guide] How US Interest Rate Hikes Affect My Stocks

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Last week on the 7th (local time), following Australia, Canada also unexpectedly raised its benchmark interest rate, causing the US Nasdaq to fall.

Even Canada, which had kept its benchmark rate steady, has returned to a rate hike stance, raising concerns that the US could also be affected.

This is due to the growing perception that rate hikes may continue ahead of the June Federal Open Market Committee (FOMC).

With the Nasdaq, which is tech-stock focused, declining, growth stocks also showed weakness in our stock market.

Let's take a look at what kind of correlation exists between interest rates and the stock market.

Canada’s Interest Rate Hits Highest in 22 Years

The Bank of Canada (BoC) surprised the market by raising the benchmark interest rate abruptly.

On the 7th (local time), BoC raised the benchmark rate by 25 basis points (0.25 percentage points) to 4.75%.

This is the highest level in 22 years since May 2001.

BoC has raised rates eight times since March last year, reaching 4.5%, the highest in 15 years.

This was the steepest tightening trend in BoC’s history.

[Image source=Reuters Yonhap News]

The market largely expects Canada to raise the benchmark rate again next month.

Bloomberg forecasted, “Since the Bank of Canada has returned to rate hikes faster than expected, there is a possibility that rates could rise even further.”

Before Canada, the Reserve Bank of Australia also implemented two consecutive rate hikes.

Australia had kept rates steady in April but raised them again last month and this month, bringing the benchmark rate to 4.1%.

This is the highest level in 11 years.

Additionally, Philip Lowe, Governor of the Reserve Bank of Australia, has hinted at further rate hikes.

Eyes on the US FOMC in June

With these two major countries switching to a tightening mode, the possibility of a rate hike by the US Federal Reserve (Fed) in June is also highlighted.

According to the Chicago Mercantile Exchange (CME) FedWatch, the probability that the Fed will raise rates at the Federal Open Market Committee (FOMC) meeting on June 13-14 is forecasted at 33.3%.

We are closely watching whether the US Fed will raise rates at the FOMC meeting held early morning on the 15th Korean time.

NH Investment & Securities predicted, “If US consumer prices stabilize and concerns about a June rate hike ease, our stock market could rise to the 2660 level this week,” but “if inflation indicators come out higher than expected, the KOSPI index could be adjusted down to the 2540 level.”

[Image source=Yonhap News]

How Interest Rates Affect Stock Prices

As mentioned earlier, depending on whether interest rates rise or fall, the KOSPI index can either rise or fall.

Our stock market is very sensitive to interest rates.

You may have heard the term ‘liquidity’ while reading stock market articles.

When interest rates rise, the available liquidity decreases, reducing the amount of funds flowing into our stock market.

Therefore, the KOSPI index may undergo a correction during rate hikes.

Conversely, during rate cuts, abundant liquidity acts as a driving force for stock market gains.

Growth stocks such as Kakao and Naver are representative of stocks sensitive to interest rates.

During rate hike periods, market liquidity shrinks, and investors tend to invest based on current earnings rather than future growth potential, so tech stocks often take a hit.

On the other hand, financial and insurance stocks are beneficiaries of rate hikes.

[Image source=Reuters Yonhap News]

Dear Joorini,

You might be wondering, “What does the US raising interest rates have to do with me?”

However, the US rate hike stance influences whether our country and other major countries raise their rates.

Accordingly, stock markets worldwide rise and fall.

This is why you need to pay attention to interest rates in countries on the other side of the globe.

Knowing which stocks benefit during rate hike periods and what strategies to adopt will help

protect your portfolio.

Keep this in mind and carefully watch the US June FOMC meeting held early morning on the 15th Korean time.

We support your wise investments, Joorini, and will end this article here.

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This article is from [Joorini Guide], published weekly by Asia Economy. We explain stock-related financial news and complex economic stories in an easy and friendly way so that stock beginners can understand. By subscribing, you can receive articles for free.

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