Global markets have transitioned from denial to a state of “no relief” as escalating tensions in the Middle East raise the spectre of a broader conflict, according to BNY’s head of markets macro strategy, Bob Savage. He suggests significant potential remains for further global market corrections, following three years of accumulated risk during a period of global growth. Savage warns that risk assets are particularly vulnerable, with recent supply disruptions exacerbating pressures across equities, bonds, and currencies.
The closure of the Strait of Hormuz and the cessation of Qatari LNG exports have triggered surges in oil prices and European natural gas, leading to a sharp sell-off in equities and a resurgence in global bond yields due to heightened inflation fears. Savage notes that traditional portfolio hedging strategies are proving ineffective under these circumstances. “The problem for offsetting equity pain is that fixed income is more correlated to, than divergent, from equity risks,” he explained.
He further elaborated that inflation resulting from energy supply shocks is likely to impede central banks from implementing easing measures, potentially emboldening hawkish elements to pursue further tightening. Savage highlighted recent remarks by Reserve Bank of Australia (RBA) Governor Michele Bullock as evidence of this shift, noting her clear indication that another rate hike is probable. The Reserve Bank of Australia is the country’s central bank, responsible for monetary policy and maintaining financial stability. BNY Mellon is a global investments company that helps clients manage and service their financial assets throughout the investment lifecycle.
Despite the tightening risks signalled by the RBA, the Australian dollar has weakened, a move Savage interprets as indicative of the market’s flight to safety amid the prevailing uncertainty. This currency depreciation underscores the heightened level of anxiety and risk aversion currently dominating global markets.
