Global stocks are experiencing cracks in their rally due to various factors that are dampening investors’ risk appetite.
After months of gains in equity markets, concerns over China’s economy, rising energy prices, and surging bond yields are contributing to this shift.
The MSCI All Country World Index has declined almost 6% from recent highs, while the S&P 500, Europe’s STOXX 600, and Japan’s Nikkei have all seen around a 5% decrease this month.
Several market factors are under close scrutiny: Firstly, a surge in bond yields is raising worries.
Stronger-than-expected growth in certain parts of the global economy is leading to bets that central banks will keep interest rates steady for longer.
US 10-year Treasury yields reached a 15-year high, while US real yields, indicating inflation-adjusted returns on government bonds, are at their highest level since 2009.
Yields in other economies are also rising, potentially making stocks less appealing as valuations have risen.
The impact of rising yields extends to economic rates, including the cost of capital.
US mortgage rates have surged, adding complexity to the housing market outlook.
Rising yields have also boosted the US dollar, creating challenges for exporters, multinationals, and emerging market economies with dollar-denominated debt.
Increased energy prices are stirring concerns that inflation’s impact on the global economy isn’t over.
European gas prices have risen by 47% in August, with oil prices nearing nine-month highs.
This suggests sustained inflationary pressures and the possibility of interest rates staying elevated.
European inflation expectations are well above the European Central Bank’s 2% target.
Britain’s rising basic wages compound concerns for long-term inflation, even after multiple rate hikes by the Bank of England.
Higher bond yields, a falling stock market, and a strengthening dollar are tightening financial conditions and heightening investor worries.
China’s property sector crisis, combined with weaker-than-expected economic data, is also influencing investors.
With property accounting for a significant portion of China’s economy, concerns arise due to tepid consumption, factory slowdowns, rising unemployment, and weak foreign demand.
The $3 trillion shadow banking sector linked to property is already facing challenges.
Both Hong Kong’s share benchmark and China’s currency have weakened significantly, grabbing global attention.
The possibility of a substantial stimulus package from Chinese authorities could potentially reverse this situation.