Equities: Fragile advance under energy and yield risks – NBC

National Bank of Canada (NBC) strategists note that global equities, including the MSCI ACWI, remain on track for another positive quarter, helped by an August rebound. However, they stress that strained traffic in the Strait of Hormuz, depleting Oil inventories, surging refining margins and generational-high government bond yields leave the equity outlook vulnerable to any renewed inflation shock.

Energy, inflation and bond yield risks

"Global equities continue to advance, but the path remains fragile. The MSCI ACWI is on track for another positive quarter, yet the Strait of Hormuz remains far from normalized, energy inventories are being depleted and supply-chain pressures are building. With long-term bond yields already near generational highs, another inflation shock could prove particularly challenging for equities."

"We continue to view this positive trend as fragile. In that sense, the market backdrop bears some resemblance to Homer’s Odyssey, brought back into the popular imagination by this summer’s box-office hit: the journey may be moving forward, but there are still plenty of hazards along the way. For investors, one of the most immediate remains the global energy market."

"The energy price risk is particularly important given the length of the conflict. It has now been six months since the conflict began, and inventories of crude oil and liquid fuels are getting depleted, which could ultimately pressure up oil prices."

"As a result, if higher energy prices were to slow the normalization of inflation, markets could further scale back expectations for monetary easing, keeping long-term yields elevated or pushing them even higher."

"In the current government bond yield environment, the potential of higher/more persistent inflation is a risk for equities. Thirty-year government bond yields are already at generational highs, reflecting not only lingering inflation concerns but also large fiscal deficits, rising public debt and heavy sovereign issuance across several major economies—all of which are contributing to a rising term premium, or the additional compensation investors demand for holding longer-dated bonds."