• Growth fuels rate risks
  • Market pricing gaps
  • Appetite for gold 

Strong US growth raises rate risks

Oil prices have been the tail wagging the market dog recently and this is likely to continue until the situation in the Middle East stabilises. At the same time, artificial intelligence remains a key factor. Rising interest rates are typically negative for technology and small cap stocks – the Russell 2000 index has indeed lagged over the last few weeks. But tech stocks have done comparatively well as the positive earnings outlook has offset the impact of higher rates.  

There is a new risk, however, for US government bond yields (and indirectly for global yields). The renewed acceleration in US business activity, as shown by the Purchasing Managers’ indices, points to continued, above-trend economic growth, at a time when inflation remains above the Federal Reserve’s 2% target. The risk of the economy overheating is rising, so even if oil prices fall, bond yields may remain elevated. Equity markets are likely to initially welcome such an environment: relatively higher growth and inflation is supportive for stocks. But if market expectations for the fed funds rate rise further, the adjustment could be painful.  

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