The rally in both bonds and stocks looks unsustainable – Nordea

In November, stocks and bonds have rallied and the US Dollar has weakened. Economists at Nordea expect markets to move back to reality.

The current rally in bonds and stocks is unlikely to continue

The rally in both bonds and stocks looks unsustainable. The next environment is likely to be one of too much economic growth and too high inflation, which will put upward pressure on interest rates and weigh on stock prices. The environment we have right now of higher stock and bond prices and lower oil prices increases the chances of this happening. 

The problem is that storm clouds are gathering. The rise in unemployment constitutes a significant risk and increases the likelihood of too little growth and too low inflation, which means the odds of bonds outperforming stocks significantly are rising. Both environments seem to be good for the US Dollar which is suffering in the current soft landing environment. The Dollar is also likely to benefit from economic divergence between the US and the Euro area, which suggests the odds of too little growth and too low inflation in the Euro area are larger than in the US.