The Daily Prophet: Nowhere to Run, Nowhere to Hide

It's starting to look worrisome in the stock market. It's not just that technology shares, which have led equities higher all year, are faltering, sending the Nasdaq 100 Index to its lowest level since mid-May. It's what the rotation out of growth and into value stocks suggests: Investors may be questioning the prospects for a stronger economy in coming months, just as central bankers turn up the hawkish rhetoric.

Few are willing to be brave and ride out the turbulence in the same week that Federal Reserve Chair Janet Yellen expressed concern that some asset prices had become “somewhat rich” and the International Monetary Fund cut its outlook for the U.S. economy. It's not just in the U.S. The upward momentum in stocks has stalled globally, with the MSCI All Country World Index poised for its worst month since October, producing little to no gain. Central bankers are coalescing around the message that the cost of money is headed higher -- and markets had better get used to it, according to Bloomberg News' James Hertling, Alessandro Speciale and Piotr Skolimowski.

"When combined with rich valuations for developed market equities, this can only warrant caution in terms of equity allocations," Alastair George, an investment strategist at Edison Investment in London, wrote in a research note. Just a week after signaling near-zero interest rates were appropriate, Bank of England Governor Mark Carney suggested Wednesday that the time is nearing for an increase. Canada’s Stephen Poloz reiterated that he may be considering a rate hike. The European Central Bank's Mario Draghi said this week that deflationary forces have been replaced by reflationary ones.

FORGET ABOUT BONDS AS A HAVEN
Hiding out in bonds no option. The sovereign bond market took its third straight hit of the week and are in jeopardy of having their first losing month of the year, based on the Bloomberg Barclays indexes. European bonds have been punished particularly hard, with the yield on the benchmark 10-year German bund rising as high as 0.46 percent Thursday from as low as 0.23 percent Monday. Two weeks of hawkish rhetoric from policy makers around the world has rewritten the outlook for bond markets, according to Bloomberg News' John Ainger, Stephen Spratt and Maciej Onoszko. The Bank of England and Bank of Canada are now seen as more likely than not to join the Fed in raising rates before the year is out, based on overnight index swap rates. Even the possibility of an ECB hike, once seen as all but impossible, is slowly growing. “Bond markets have been conditioned to thinking that whenever there was a slip-up in risk appetite somewhere and a tightening in financial conditions, the central banks would come to their rescue,” said Mark Chandler, the head of fixed-income strategy at RBC Capital Markets. “Now it’s almost as if the central banks are engineering the tightening in financial conditions. Does that mean more volatility? The sure answer would be yes.”