Since the beginning of 2022, equity markets have experienced various phases driven by changes in inflation and growth outlooks. Despite growth maintaining a more robust position than many investors initially anticipated, the continuous climb in interest rates and stagnant profit growth have been dominant factors.
However, the swiftness and the size of the rate readjustment have taken many by surprise. Perhaps it's now an opportune moment to align with the short-rates trend, particularly if we consider the supply argument at face value. In this context, there could be additional room for rate increases, especially considering that a significant portion of the anticipated supply increases are yet to materialize.
Equity markets appear poised for continued challenges as bond yields persistently rise and put valuations to the test. Despite lacklustre economic data and inflation behaving within expectations, yields are in motion again, confirming a transition to a "higher-for-longer" interest rate environment.
As interest rates chart significant adjustment paths, traders may find it necessary to prepare for, or at the very least contemplate, the prospect of convexity hedging by mortgage investors. In theory, this could potentially amplify the ongoing selloff in the market.
The real concern for the global market is that the increasingly hawkish stance of the Federal Reserve is spreading the adjustment in longer-term interest rates in the United States worldwide. Unfortunately, this is happening at a time when other central banks are contemplating easing measures to stimulate their respective economies.
While it feels suitable to play for "it’s time for a rates breather," yields may continue rising until some adverse effects or external events intervene, especially with the significant proportion of the bond supply increase yet to come; traders may continue to demand higher term premiums for a while longe.
SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.
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Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.