Real yields, although they are at their highest since last June, will remain deeply negative for some time. But their rise poses problems for assets that have benefited from the reasoning that there is no alternative (TINA). Over the past week, stocks have faltered, bitcoin has fallen 8%, and the Nasdaq, the epitome of low-interest stocks, has lost 4.5%.
The small jump in real rates (Source FRED / Fed de Saint-Louis)
Holders of longer bonds are probably also nervous – these assets have seen large outflows over the past four weeks, notes Goldman Sachs.
In the meantime, inflation is not easing; Eurozone prices rose 5% year-on-year in December and Wednesday’s US CPI is expected to be over 7%. The ECB has remained staunchly dovish, however: Board member Isabel Schnabel said over the weekend that the bank may have to act if energy price hikes prove to be persistent. The euro started the day on Monday down 0.3%.
So what happens to stocks if real returns continue to rise? There have been many episodes where stocks have risen alongside real returns, the most recent being the period March 2020-February 2021, where a 1.5% increase in real returns was accompanied by a return of 50. % of global equities.
Seeing this, Berenberg recently advised his clients not to budge. However, the share of rate-sensitive technologies is much higher today than in the past, which could change the equation somewhat.
Finally, let’s not forget the disturbing geopolitics and the rapid spread of the Omicron, both capable of worsening inflation and slowing economic growth. Oil prices are extending their 5% gain from last week and negotiations between the United States and Russia look set to begin later today, with low expectations.