As bond yields fall, the prospects for equities rise | Ausbiz
Isaac Poole from Oreana Financial Services believes central banks are quickly losing control of the narrative with investors clearly focused on growth risks whilst they remain fixated on inflation. However, he questions how long it can remain that way given how quickly economic data readings are starting to roll over. “Growth is slowing quickly in all developed markets. That will give way to a recession if we see ongoing hiking with abandon,” Isaac says. “The BoE will probably hike again this week, the RBA will go again, and we might see another hike from the Fed and the ECB.” Given the rapid-fire, super-sized rate hikes coming through, Isaac says bond markets are pricing in the prospect of a hard economic landing. “The collapse in the 10-year real yield is pointing to recession, as is the hump in the forward pricing for Fed Funds,” he says. “The 10-year nominal looks increasingly heavy. We think 2% is possible this year.” Isaac believes the Fed and other central banks may choose to pause hiking in the coming months, helping to stave off the threat of a damaging and destructive economic downturn. As such, he likes both longer-dated bonds and equities at this juncture. “Despite the massive rally from the peak in yields, we think longer-dated duration has a long way to rally,” he says. As for equities, Isaac says there’s still scope for surprise on the upside. “This will be a combination of very pessimistic earnings expectations and falling yields,” he says.
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