Receive free updates on Markets
Sign up for our myFT Daily Digest email to stay informed about the latest news in the Markets every morning.
During the summer, financial markets frequently referred to the familiar fairy tale of Goldilocks. Just like in the story, key economic data releases were not too hot or too cold, but just right. Jobs and inflation figures indicated that the US economy was enduring the Federal Reserve’s interest rate hikes, but there may not be a need for further action until inflation is under control.
Now that summer is over and investors have come back to reality, they remember that the Goldilocks story ends with the protagonist being frightened by hostile animals. In financial markets, this translates to a drop in the benchmark S&P 500 index in August and weak performance in the opening days of September on both sides of the Atlantic. According to UBS strategist Bhanu Baweja, we have reached “Peak Goldilocks”.
Nervousness in the market is also fueled by rising oil prices. Brent crude surpassed $90 a barrel for the first time since November, as Saudi Arabia and Russia declared extended supply cuts. This increase in prices, up a quarter since June, renews concerns about inflation. The narrative that investors previously relied on to understand market behavior has shifted. Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, describes it as a “narrative-driven market”.
Over the past couple of months, the prevailing narrative has focused on a soft landing, where central banks successfully manage inflation without causing a significant economic downturn. The pessimists who predicted a recession this year were proven wrong, as the US has avoided a recession and stock markets have performed better than expected. However, Ahmed still believes that the aggressive interest rate hikes by the Federal Reserve will eventually have consequences.
Up until now, growth-focused equities and risky corporate bonds have performed well, seemingly unaffected by the rate increases. But this cannot last forever, especially as companies that relied on cheap money after the Covid pandemic will need to refinance their debt at higher rates in the next couple of years. Europe is already experiencing the impact, with stagnant stocks and a weakening euro against the strong US dollar.
Market participants are now finding it easier to identify reasons for caution. Rising oil prices, European gas price spikes, China’s struggling economy, and even challenges faced by tech giant Apple in China all contribute to a growing sense of unease. Even positive news, such as the US services sector performing well, is seen as a potential signal that the Federal Reserve needs to do more to control inflation.
The situation is beginning to resemble 2022, a year marked by sinking stocks and declining bond prices. However, there are some key differences. Global stocks have already climbed 13% this year and government debt yields are high, providing some cushioning. Holding government bonds until maturity may not cause concern, but the Bank of America warned that the US 10-year Treasury bond is on track for a third consecutive down year, a streak unprecedented in US history.
Unless stocks can turn things around and provide a fairy tale ending to this year, 2023 may prove to be disappointing once again.
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
