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The global outlook looks troubled as rising rates, oil prices, and the U.S. dollar threaten to exacerbate economic slowdowns. Despite recent economic resiliency, headwinds are building, and investors should be actively positioning their portfolios toward high-quality and defensive assets ahead of the upcoming downturn.
U.S. 10-year Treasury yield, Brent crude oil price and U.S. dollar index (2019-present)
Source: Federal Reserve, ICE Futures Europe, CME Group, Bloomberg, Principal Asset Management. Data as of September 30, 2023.
The post-pandemic recovery is being tested by gathering global storm clouds. China's economic story has disappointed as the property sector weighs heavily on consumption. Proactive and meaningful policy support is required if China's economy is to hit its 5% growth target. Europe is heading for stagnation, weakened by China's economic struggles and ECB monetary tightening. And while U.S. growth has exceeded expectations, with consumption headwinds building, growth is poised to decelerate.
The convergence of rising interest rates, soaring oil prices, and a strengthening U.S. dollar has created a concerning scenario. Bond vigilantes have reacted to the “higher for longer” narrative and fiscal deficit concerns, while supply cuts and geopolitical tensions in the oil market have put upward pressure on prices. Additionally, the Fed's more hawkish stance compared to other central banks has bolstered the U.S. dollar's value.
Previous bond bear markets have ended in financial turmoil. And when combined with rising oil prices and a strengthening U.S. dollar, there is an elevated risk of casualties across the global financial system. If bond yields continue to rise relentlessly, something will eventually break.
Although there are a few positive aspects in the global economy, such as Japan's recovery from a prolonged period of lackluster growth and India's impressive growth trajectory, the global economic outlook remains weak and vulnerable to a lengthening of the bond yields, oil, and U.S. dollar upward moves. Tensions are building, investors should be positioning portfolios for defense.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.