By: Fiona Cincotta, Senior Market Analyst
Government bond yields are surging in unison across the United States, Europe, Australia and Japan, and oil driven inflation is the reason markets have flipped from pricing rate cuts to pricing rate hikes. Several of those markets are trading at yield levels not seen in more than 15 years, with Japan's equivalent at levels unrecorded in almost three decades. What makes this move different is its cause. It stems from a supply shock in energy rather than from an acceleration in growth, and that difference is what is now dragging on gold and on equities at the same time.
Fiona Cincotta, StoneX Senior Market Analyst, covers global macro markets and brings more than 15 years of experience analyzing United Kingdom, European and United States markets across foreign exchange, equities and commodities. Energy prices, inflation expectations and the government bond market sit inside the daily scope of that coverage, and this move connects all three.
Markets have repriced the probability of a Federal Reserve hike in September to around 70%, up from roughly 35% a week earlier, and rising energy costs are the trigger. Escalating tension in the Middle East has pushed crude sharply higher, and higher energy prices pass through into headline inflation with very little delay. Consequently the European Central Bank is also expected to move this month, with markets positioning for the possibility of a further move before the year ends. Cincotta describes the signal from that repricing bluntly, noting that "the message from markets is becoming increasingly clear, inflationary pressures are rising and central banks needing to respond". For anyone holding duration, that shift means the path of policy is being rewritten by a supply shock rather than by demand strength.
Gold has slipped to a three week low and equities are selling off globally as government bond yields climb. The mechanism is straightforward, and Fiona Cincotta puts it plainly. "Higher government bond yields increase the opportunity cost of holding assets that don't generate income", which leaves gold competing against a bond market that is paying more to hold it, while a stronger United States dollar adds a second layer of pressure on the precious metal. Equities face a related problem, because a higher discount rate weighs on valuations at the same time that policy expectations turn less supportive. Whether this is a pause or something larger remains open, as Cincotta frames it, "the key question is whether this is simply a pullback within a broader bullish move, or whether this is actually the beginning of a deeper correction".
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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