With half an hour to go before the close, the DAX is battling to hold the 25,000-point mark. Rising energy prices combined with a further increase in bond yields are increasingly driving investors away from equities. Brent crude has climbed back above $105 a barrel, bringing the spectre of inflation back into focus.
High oil prices are fuelling concerns about another surge in inflation and, consequently, monetary policy remaining restrictive for longer. At the same time, prices of many government bonds continue to fall, pushing yields higher. This is where the high level of public debt in many countries becomes increasingly relevant. Rising yields make refinancing more expensive and progressively restrict governments’ fiscal room for manoeuvre.
The real problem is not so much that current yields are exceptionally high by historical standards. Rather, governments, companies and investors became accustomed to extremely low interest rates over many years. It is not the new interest-rate reality that is unusual; it was the old one. Markets are now increasingly pricing out precisely this adjustment effect.
Rising yields are therefore no longer merely acting as a ceiling on equity markets; they are beginning to exert direct downward pressure on share prices. This makes the upcoming earnings season all the more important for the remainder of the year. In this environment, equities will remain attractive only if earnings momentum remains strong and companies return to higher growth rates. The higher bond yields rise, the more equities will have to justify their risk premium through stronger earnings growth.
