Another day, another drop.. why it's happening ?


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European indices closed down. DAX 330 points in negative territory, CAC 104 points, UKX 108 points.

US indices also erase more than 2% of their value. DJIA declined by 640 points (2.56%), S&P by 60 points (2.23%) NDX 176 points (2.5%).

Reality hits investors. That the FED will raise the interest rate at least 3 times this year is negative for companies .. but why?

Upon raising the base interest rate, commercial banks will receive FED funds at a higher interest rate, which in turn means that commercial banks have to lend their loans (to small traders, individuals, small investors) with higher interest rates.

For example: If now the average American should have taken $10,000 with a 1.5% interest after one year, he has to pay the bank $10,150. But if the interest rate rises (assuming that the FED will raise the interest rate by 25 basis points each time) 3 times, that makes a 0.75% increase (assuming banks will raise interest rates on loans by the amount the FED raises the interest rate ). After raising the 0.75% interest rate, the $10,000 interest will no longer be $150, but $225. This will reduce investment by smaller investors.

The companies themselves also very often are taking loans for their business. And same like others, they have to pay interest on their credits. If the interest rate rises, interest on their credit will increase along with that. Which means that in order to offset the increase in the interest they have to repay, companies have to raise their products prices = reduce their competitiveness.

Trader Bozhidar Arabadzhiev

 Varchev Traders

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