Tighter monetary policy was widely expected to hurt bonds and equity valuations, especially in the ultrastretched growth stocks such as tech. With an additional Russian invasion of Ukraine, the possibility of all-out war in Europe and an all but imminent Russian bond default, one can understand why equity investors are capitulating.
Fixed income, usually a safe haven in choppy seas, has not provided much relief. Soaring inflation has led to developed world benchmark yield curves steepening and widening over the past three months as yields rise . According to Bloomberg, the 10-year real yield in the US continues to be at a record low of -4.6%, making fixed income an unattractive asset class. Investors have duly piled into cash.
There is no doubting the damage Russian energy dependence is wreaking on the eurozone economy. Addicted to mainlining Russian gas straight into its economic veins, the costs to Europe of going full “cold turkey” and blocking Russian energy exports are becoming apparent. European investor confidence, a lead indicator, has plummeted since the war started.
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