(Bloomberg) - JPMorgan Chase & Co. strategists led by Marko Kolanovic say global markets are pricing in an aggressive wave of monetary tightening this year that’s unlikely to materialize in full -- reinforcing the allure of stocks tied to the economic cycle.
With the Federal Reserve expected to raise interest rates in March for the first time in three years, two-year Treasury yields have spiked more than 80 basis points for the highest level since later 2019. That’s increasing the competition for global capital and hurting valuations for richly valued assets like technology equities and junk-rated bonds.
“We believe risky asset markets have mostly adjusted to monetary policy shifts by now,” the JPMorgan analysts wrote in a note to clients Monday. “Short-term rates markets have likely moved too far vs. what CBs will ultimately deliver in hikes this year.”
The impact from these tightening moves from developed countries, the strategists argue, is likely to be partly offset from China, where the central bank is pivoting toward monetary easing. What’s more, growing Russia-Ukraine tensions have the potential to force major central banks to temper their hawkish stance, per JPMorgan.
“While the risk of conflict in Ukraine is high, it should have limited impact on global equity markets and would likely prompt a dovish reassessment by CBs,” Kolanovic said. “We expect risky asset markets to rebound as they digest these risks and sentiment improves, aided by inflows from systematic investors and corporate buybacks.”
Sovereign bonds have fallen this year as policy makers from the U.S. to Europe embark on a tightening path to rein in inflation. The S&P 500 is down 9% from a record high reached in early January as traders up their expectations for rate hikes.
Kolanovic and his colleagues are steadfast equity bulls who favor cheap, economically sensitive stocks. Last month, the team urged investors to buy beaten-down stocks such as small caps after those companies priced in an economic recession -- spurred by a Fed hawkish policy mistake -- that’s unlikely to come true.
The strategists have pushed back for months against hawkish market expectations. In October, they said the fear over rate hikes -- via a flattening yield curve and a swift rotation out of rate-sensitive growth equities -- was misplaced. Now, the number of interest-rate increase implied in the market for overnight index swaps for this year has increased to almost seven.
By Lu Wang
