Central banks have dialed up their resolve to combat inflation in recent weeks. In response, markets have become so unmoored a major financial and economic crisis can’t be ruled out. That means global monetary policy hawkishness may have hit its peak and something will eventually break. The impact on four big asset classes will be very different.
Things are starting to break
It’s absolute mayhem in global markets right now. In the US, the S&P 500 re-confirmed a bear market after sinking through the June lows and the two-year Treasury bond has sold off for a record number of days. In the UK, the currency dropped to all-time lows against the US dollar and government bond yields mounted their highest climb ever in a two-day period. In Europe, German 10-year yields breezed through the 2% barrier, having started the year with a negative yield. In Japan, the central bank was forced to intervene in currency markets as the yen fell to its lowest against the US dollar since 1998. Italian bonds are taking it on the chin with 10-year government bond yields rising above 4.5% for the first time since the height of the sovereign debt crisis in 2013.
Something is going to break. The Fed’s resolve will soon face its most pressing test. There are so many stressors piling up, it truly is the everything risk right now. Policymakers cannot possibly put out all the fires. One of these economic pathogens will metastasize into a full-blown crisis. And that’s when the policy about-face will come. How this plays out in four distinct financial markets — equities, fixed income, currencies and housing — will differ.
The dizzying rise in the dollar is the most worrying development because episodes of prolonged dollar strength usually end in crisis. The good news for fixed income investors is that a crisis would cap bond losses. Crisis or not, stocks are still in for a slow grind as earnings disappoint for many more quarters into the future. Housing will suffer, too.
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www.bloomberg.com/news/newsletters/2022-09-27/global-market-stress-is-piling-up-something-is-about-to-break