Global financial markets are moving from a period of summer calm to increased volatility, influenced by several factors including rising bond yields and renewed fears of interest rate hikes. While the Dow, S&P 500, and Nasdaq previously surged as Treasury yields eased and rate-hike concerns faded, the current sentiment reflects a shift towards caution.
A stronger-than-expected US jobs report intensified speculation of a Federal Reserve rate hike, with traders now stepping up bets that the Fed will begin raising interest rates at its September 16 meeting. This has contributed to a global bond selloff, repricing the cost of money, and causing the dollar to rise while the S&P 500 closed lower. European bond markets are also experiencing a selloff, with French, Italian, and UK longer-term borrowing costs rising the most in the G7 over the past month, pushing yields to multi-year highs, driven by soaring gas prices and growing political risks.
Geopolitical tensions, particularly an escalation in the Middle East, have pushed Brent crude oil prices above $97 a barrel. This rise in oil prices is contributing to higher bond yields in Europe and Asia and fueling inflation concerns. The yen has surged to its strongest level since February, surpassing the peak reached after July's intervention, while the dollar fell 0.2%. Investors are preparing for a week packed with events, culminating in the US inflation print, which will heavily influence the Federal Reserve's decision on interest rates.
Despite the rising volatility, some analysts, like JPMorgan Chase & Co. strategists, suggest buying the dips in equities, given a robust earnings outlook. They argue that moderate central bank tightening is unlikely to derail the positive backdrop for stocks unless inflation expectations change significantly, and that rising corporate profits make any weakness in equity prices an opportunity to add positions. However, BNY's Geoff Yu warns that bond markets will remain nervous, and the risk of a hawkish Fed will be reflected in equities.
