Macroscope

Forget ‘soft landing’: Global market rally is sowing the seeds of its own destruction

The current surge in market sentiment is driven by conflicting and irreconcilable forces – an improving outlook will spur inflation, which will lead central banks to raise, rather than lower, interest rates

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An electronic stock board shows Japan’s Nikkei 225 index at a securities firm on January 24 in Tokyo. In just a few months, the market narrative has shifted from one of rising inflation and collapsing growth to one of declining inflation and improving growth. Photo: AP

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 10:00pm, 9 Feb 2023Updated: 11:02pm, 9 Feb 2023

Has inflation peaked and will interest rates come down by the end of this year? This has been the question on the lips of every investor since a fierce rally in markets took hold at the beginning of this year. With inflation still running hot around the world and leading central banks continuing to raise rates, speculation about lower borrowing costs seems woefully premature.

However, markets are forward-looking and see light at the end of the monetary tightening tunnel. What is more, investors are more optimistic about the outlook for global growth, heartened by the unexpectedly rapid reopening of China’s economy and the dramatic fall in wholesale gas prices which has provided a major fillip to Europe’s economy.

In the space of just several months, the market narrative has shifted from a rising inflation-collapsing growth environment to a declining inflation-improving growth one. This has provided ammunition for those betting on a “soft landing”, whereby inflation is brought under control without causing a full-blown recession.

Every major asset class, with the exception of the US dollar and commodities, has delivered positive returns since early January, which is a stark contrast to last year’s bloodbath.

In a sign of the degree to which sentiment has improved, some of the riskiest assets – “junk” bonds, “meme stocks” championed by retail investors on social media and even bitcoin – have enjoyed a huge bounce.

In a report published last Sunday, Morgan Stanley noted that, “across assets, it has been one of the strongest starts to a year in recent memory.” Yet, as is often the case in markets, asset prices overshoot in response to changes in economic data or shifts in policy, especially ones open to interpretation.