Stocks rise but bond market signals trouble ahead

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European stock markets started the second quarter with marginal gains this morning.

Last night, Wall Street and Europe closed the first quarter in deficit since the start of the Covid-19 pandemic in early 2020.

Stocks rallied towards the end of the last quarter with the S&P 500 index up 11% in the last 12 days of the quarter.

However, the bond market is warning of tough times ahead.

“There is an absolute collapse in global bonds,” Paul Sommerville of Sommerville Advisory Markets told Morning Ireland.

He explained that an index fell 11% from its peak last year in what was the worst selloff since the financial crisis.

“Bond prices fall when interest rates rise. The market perceives the Fed will need to raise rates at least nine times in 2022 and they believe the ECB will raise rates as well,” he said.

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More worrying is a phenomenon called “yield curve inversion” – where interest rates on short-term debt rise above long-term rates – the occurrence of which is interpreted as heralding a recession.

“The bond market thinks a recession is coming in 2023,” said Paul Sommerville.

“Every recession since 1955 in the United States has been preceded by an inversion of the yield curve and this is happening in the bond market. This means that there are problems ahead in 2022 and 2023.”

Richard Hunter, head of markets at Interactive Investor, said the diverging outlook among bond and equity investors had been driven by the threat of excessive tightening from the US Federal Reserve.

“Equity investors expect the Fed to stage a soft landing, with the economy showing real signs of strength and more recent market declines providing buying opportunities based on valuations,” he said. he declared.

The next event on the horizon for the markets is the US Nonfarm Payrolls release later today.

“Equally important will be the unemployment rate, which has recently strained a labor market close to full employment,” Hunter said.

“While this effectively frees the Fed to focus on inflation, the tightening could also lead to wage hikes which would be other inflationary factors in themselves,” he added.

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