Analysts warn that stock markets could face a ‘perfect storm’ due to high rates and concerns over China

“The current situation in the Chinese property market, combined with the rise in U.S. bond yields and the decline in U.K. retail sales, is presenting a challenging scenario,” stated Russ Mould, AJ Bell Investment Director, in an email.

The decline in market performance on Friday added to the losses experienced earlier in the week, after minutes from the U.S. Federal Reserve’s latest meeting indicated concerns about inflation and the possibility of further interest rate hikes.

This led to an increase in U.S. Treasury yields, while German bunds rallied to their highest level since March’s Silicon Valley Bank collapse.

The bankruptcy protection filing by Evergrande, along with Country Garden’s decision to suspend bond payments, has heightened concerns about China’s real estate market.

“Current market conditions are being influenced by multiple factors, including rising rates, poor economic data in China, low liquidity, and reduced buying activity,” stated Emmanuel Cau, Head of European Equity Strategy at Barclays, in a research note.

Cau expressed concerns about China’s lack of decisive policy action and how it may impact European and U.K. stocks.

Barclays recommends a “barbell” investment strategy that includes allocations to both cyclical and defensive stocks, with a focus on undervalued companies.

Additionally, U.K. retail sales experienced a significant drop in July, which further dampened market sentiment.

The upcoming Fed’s Jackson Hole symposium and flash PMI readings from major economies, especially the U.S., will be closely watched as growth continues to exceed expectations.

While the market seems to be acknowledging the risks identified by economists, David Roche, President of Independent Strategy, believes that there could be further downturns once geopolitical and macroeconomic risks are fully priced in.

Riche stated, “I believe that when the correction occurs and people realize that lower inflation affects profits, along with the various problems in different regions, including China, there is still significant downside potential in the markets at current levels.”