Thursday's Market Minute: Equity Markets May Face A Harsh Reality

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There is a lot of unease in the bond market about how far the Fed goes and how bad the inflationary trend may become. As a result, capital markets have been full of violent swings in stocks, bonds, and commodities. Falling bond prices recently lifted the 10-year Treasury yield to 2.3%, its highest level since May, 2019. Borrowing costs for companies and individuals have been rising since late December.

The bond market is responding to expectations of tighter monetary policy, but equity markets are saying that if Powell is confident about the growth outlook, then risk assets will do well. It appears as if markets know what the Fed’s reaction function is and has rate hikes priced in, as financial markets have spent much of this year in anticipation of higher interest rates.

We have clearly seen an improvement in sentiment recently as investors have become encouraged by the negotiations between Ukraine and Russia and confirmation of a hawkish stance on rates by the Fed. However, stocks may still struggle for a while as geopolitical risk uncertainty may continue to send energy prices higher, and that will leave an unbalanced global growth picture that will make it very difficult for companies and policy makers.

Markets may also eventually face a harsh reality that sets in as a delayed reaction to the hawkish position taken by the Fed. The reality is that they most likely won’t be able to navigate a soft landing and be forced into a difficult decision later this year if inflation pressures don’t subside.

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This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.