The Reserve Bank of Australia is likely to cut the cash rate today — all that remains now is to see how the market reacts. If it’s anything like the last time it did so, the reaction will be muted.

When the cash rate moves in either direction (although almost always down of late), it has the potential to impact the market.

Movement down means more discretionary spending in the market, while movement up means an increased cost of borrowing — which banks will invariably pass onto customers.

Given banks are some of the biggest stocks out there, it makes sense that a rate cut could impact the market directly — but a rate cut also says a lot about the state of the economy.

So here’s what to look for:

The case for the market remaining steady

According to Star Investing analysis, the last five times the RBA reduced rates, the market (the ASX200 at least) reacted with something approaching a murmur.

In theory, rate cuts should flow through to the consumer through home loan rates going down — leaving them with more discretionary spending to power the economy.

However, outside banking stocks it’s been hard to say any movement has been outside the standard deviation for the market.

So, it could be reasonably expected that all the players buying in big volumes (institutional investors) already had their bets placed on whether the cash rate would be reduced –meaning there was little action in the aftermath.

Date of cash rate movement One-day reaction One week reaction
3 August 2016 (-25 basis points) +0.58 percent +1.43 percent
4 May 2016 (-25 basis points) +2.11 percent +1.48 percent
6 May 2015 (-25 basis points) -0.82 percent +0.40 percent
4 February 2015 (-25 basis points) +1.23 percent +1.63 percent
7 August 2013 (-25 basis points) -1.85 percent +1.02 percent

The case for the market going bonkers

The market, if nothing else, is completely irrational.

While the rate cut itself may not affect the investment rubric to much, the devil will be in the detail of Philip Lowe’s statement, should the RBA move to cut rates.

After all, cash rate cuts are designed to stimulate the economy and keep inflation within target ranges — and there’s a reason for the stimulus.

If Lowe’s statement offers detailed rhetoric on why weakness in the economy prompted the rate cut, it could be reasonably expected that overseas investors particularly look to place their bets elsewhere.

On the flip-side, the market could very well enjoy the prospect of more money sloshing about the economy — particularly toward consumer-facing businesses.

It’s also been a fair old while since the RBA cut rates — so as much as a cut may be priced in, the RBA finally doing so may trigger a few traders.

The wildcard

Since the last rate cut, a whole new category of businesses have come to life: fintech companies.

Nobody’s really had a beat on how investors in publicly listed fintech plays will react — but if they’re involved in lending or borrowing money then there is the potential for them to be impacted.

If their cost of borrowing goes down, that’s a good thing — the question is what sort of discount they may pass onto the consumer at the end of the chain.

Given a lot of fintech plays are by definition in early growth stages, the temptation must be there to arbitrage and keep a little bit of margin for themselves.

Watch this space.

 

This content does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.