Global stocks defy bond market chaos

“Of course, investing in bonds or stocks are substitutes, and some of the money flowing out of the wobbly bond market could well be going into stocks. However, in the big picture, higher interest rates are not positive for economic growth and therefore for earnings prospects and stocks.”

The trend was particularly evident on Wall Street on Friday as the S&P 500 added 0.5 percent, even though the two-year US Treasury note yield, which is influenced by short-term interest rate expectations, jumped 14 basis points to 2.28 percent.

The intensification of bond selling reflects the market’s rapid recalculation of the Fed’s tightening path, with an average of 8.2 quarter-percentage-point hikes now priced in for the central bank’s remaining six meetings in 2022, vs. at 7.7 on Thursday.

This implies that an additional increase of at least half a percentage point is needed in three of its next six meetings to meet market expectations.

Trader Citi is asking the Fed to deliver a 50 basis point hike at its next four meetings, while Bank of America has forecast two half percentage point hikes.

Citi says that one way to explain the rise in share prices amid a more aggressive Fed is that projections for real policy rates, which are adjusted for inflation, have dropped.

“If even an aggressive Fed leaves real rates low, then equities should have little to fear,” said Citi chief economist Andrew Hollenhorst.

Economists at National Australia Bank pointed to signs of a Russian de-escalation as another factor helping to risk assets such as stocks after Moscow said on Friday it was nearing the end of the first phase of its military operation in Ukraine.

Meanwhile, the UK has provided a tentative draft roadmap to ease sanctions on Russia, with British Foreign Secretary Liz Truss stating on Saturday that sanctions on Russian individuals and businesses could be lifted if the country withdraws from Ukraine.

Another boost for stocks has been institutional investors hedging their short positions in speculative tech stocks, highlighted by the ARK Innovation exchange-traded fund, which has gained 23 percent since mid-March.

“Flow data supports a further decline in retail purchases, reinforcing likely short covering,” NAB economists said.

While some commentators have suggested that stock markets are rallying on optimism that the US will avoid a recession, the NAB remains skeptical.

“The key to stock resilience and earnings resilience assumption in the face of inflationary pressures will be the upcoming earnings season for the first quarter, which starts in earnest during the second week of April,” the bank said.

leading the charge

the The Australian stock market has continued to outperform Wall Street due to the broad rally in commodity prices favoring the local market given its strong exposure to the resources sector.

Macquarie revealed that it has made broad changes to its strategy to increase exposure to resources and value, while reducing its exposure to overseas earnings, and advises investors to position themselves for a commodity boom.

“Based on a study of past sanctions, we now believe that Russia’s sanctions could last for many years, even if a peace deal is reached,” the Macquarie strategists said.

“There will be investments to reduce dependence on natural resources from Russia and as countries look to stable democratic countries for sources of supply, Australia stands out.”

The broker said this has boosted the Australian dollar 5 percent rally in the past monthand his model using Australian and US commodity prices and bond yield spreads suggests the currency should be 96¢.

“If we are at the beginning of a period that is like a commodity boom, many investors will remember that the Australian dollar rose to a high of $1.10 in July 2011,” Macquarie said.

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