US rates may rise but economic risks are rising faster

Subject

Global equity market trends.

Significance

The four main US stock market indices began March at record highs, including the benchmark S&P 500 index at 2,400. Driven by expectations of stimulative and pro-business policies under the new US administration, equity markets are flying in the face of signals from the Federal Reserve (Fed) that interest rates will rise three times this year. The probability of a hike at the Fed’s March 14-15 meeting has risen above 80% on growing price pressures and stronger economic data, buoyed by hawkish comments from several Fed governors, including those who were previously dovish.

Impacts

• Despite the post-election US bond market sell-off, around one-third of the stock of euro-area sovereign debt remains negative yielding.
• The gap between the two-year US Treasury bond yield and its German equivalent has widened to a record, a sign of rising monetary divergence.
• The euro lost 2% against the dollar in February as political risks escalated in the euro-area, centred around the French election.
• The emerging market MSCI equity index is 8.6% up this year, after losing 4.5% from November 9 to end-2016, a sign of higher confidence.