After a gloomy February, markets could experience the madness of March

Crazy March? After a euphoric January and a gloomy February, in which fixed income and equities plummeted as expectations of increases in interest ratesworld markets could undergo new oscillations.

The 10-year US Treasury yield is about to end February up about 40 basis points for the month, its biggest monthly jump since September. In Europe, yields on notes, which move inversely with prices, are near multi-year highs.

The S&P 500 Index is down nearly 2% after rising 6% in January and stocks have broadly weakened across geographies and investment strategies, with unclear direction.

In short, there remains a lot of uncertainty about the future trajectory of the global economy and rates.

If the data continues to hold up, the sell-off on expectations of further monetary tightening could continue. But if signs of slowing inflation and growth are strong enough to trigger a pause, asset prices could rise again, with volatility in between if data signals are unclear.

In a potentially bearish sign for stocks, where valuations are propped up by bond yields, the MOVE index, which measures expected volatility in the equity market, Treasure $24 trillion, is up more than 20% in February, its biggest monthly jump since June 2022.

Investors had hoped in January that an economic slowdown would encourage rate-setters to pause after a series of aggressive hikes to curb inflation. However, strong data since then challenged that view.

Data released on Friday showed that a key indicator of US inflation had accelerated last month, stoking bets on a rate hike. Some economists believe that the Federal Reserve it could even opt for a strong 50 basis point increase in March, after rising 25 basis points this month.

“Investors have noticed that central banks tell us that inflation will return to target later than they would like and that means rates will be higher for longer.” said Guy Miller, chief market strategist at Zurich Insurance Group.

back to earth

Stocks continue to rise slightly on the year, but have been held back by the return of fears of a rate hike. MSCI’s broad index of stocks emerging markets it plunged 6.3% this month, after rising nearly 8% in January.

Growth stocks tracked by an MSCI index made up mostly of tech companies, which do well when rates are low, fell 1.7% in February. MSCI’s measure of value stocks – cyclical companies that offer high dividend yields and are attractive when rates rise – is down 2.4%.

Meanwhile, European data has reinforced the sentiment that growth is holding up, with a key indicator of euro zone business activity at a nine-month high.

As a result, investors are re-examining their soft landing scenario and fear that central banks will tighten monetary conditions too much in response to the good data, triggering a deep recession.

“Economic data is starting to pick up, but in the long run, good news is bad news, because central banks have a lot of work to do.” said Trevor Greetham of Royal London Asset Management.

Jim Reid, strategist at Deutsche Bank, warned that most of the impact of the rate hikes that major central banks embarked on in late 2021 is yet to come. “It’s not until the second year or so of the rising cycle that the real economic pain tends to be felt,” he said in a note.

Markets expect Fed rates to peak at 5.4% this year, after quickly unwinding bets on rate cuts late in the year. The official Fed rate is between 4.50 and 4.75%, the highest since 2007.

Operators anticipate that the European Central Bank raise rates a further 150 basis points between now and the end of the year, after learning on Tuesday that French inflation rose unexpectedly in February. The ECB has raised its official rate by 300 basis points since July, to 2.5%.

The dollar index, which compares the greenback against a basket of six major currencies, has gained 2.6% in February, marking its best month since September thanks to renewed bets on rate hikes in USA.

Meanwhile, many bond yields remain negative for the year. German notes have lost 0.52% since the start of 2023 and British gilts, 0.82%. US Treasuries are also in the red, down 0.28%, a 7-10-year index shows.

If the upcoming data weakens, markets could resume their bullish trend, according to Yardeni Research.

“But if, instead, the March data confirms the worst-case inflationary no-landing scenario, the ensuing March madness could send the 10-year Treasury yield above its most recent high of 4.25% on May 24. October, with the S&P 500 falling toward its October 12 bear market low of 3,577.03.” he said in a note.