Last week, we wondered why stock markets had not reacted more negatively to the latest upward wave of bond yields, when this had led to a formidable stock market correction back in February. As it turned out over the course of this week, it seems to have just haven taken them a little longer to come to terms with the fact that, whether it’s higher inflation expectations or better than expected growth that’s pushing bond yields higher, the outcome is the same: higher bond yields that choke equity market upside prospects.
By the end of this week, the stock market sell-off has become more pronounced, with equity markets around the world having lost around 6% since their September highs. We’re not quite yet in correction territory (-10%), but the fact that, compared to February, this has pushed them in many cases below their 200-day moving average does not bode well for investor sentiment in the shorter term. Experience tells us that once certain critical threshold levels have been broken it is much less likely for markets to resume their previous upward (or at least sideward) trend.
