The repricing of central bank reaction functions rather than improved growth prospects has been the primary driver behind the recent bear steepening of the yield curve in the US and Europe. As a result, risky assets, particularly long-duration stocks, have struggled to absorb these rate increases. Notably, the Nasdaq has underperformed the S&P 500, even beyond what would be expected based on their historical relationship with US 10-year rates. This trend has extended to growth versus value stocks and small versus large cap. While financial stocks have rebounded, they continue to lag behind their historical relationship with interest rates. Additionally, the correlation between equity prices and bond yields has turned negative again, reflecting the “good news is bad news” sentiment in the US and ongoing concerns about sticky inflation in Europe.
Interestingly, UK equities have been a bit of an outlier within the global downtrend, with the FTSE 100 outperforming in local currency and dollar terms. This outperformance is closely tied to the positive correlation between the FTSE 100 and oil prices. Commodity strategists anticipate further gains in oil prices, with most revising their 12-month Brent crude forecasts upward to $100 per barrel. Conversely, many traders expect GBP to face downward pressure due to weaker growth, higher inflation, and lower real interest rates, projecting a decline in GBP/USD to 1.19-1.1800 within three months. Higher oil prices and a weaker pound typically buoy the FTSE 100.
