Debt has risen sharply over the last 10 years, both in states, companies and private households. The higher level of debt has generally worsened the quality of borrowers and defaults will increase with rising interest rates.
The bond markets are massively overpriced due to the various actions of central banks. This was understandable while there was risk of deflation, but now labour markets and consumer sentiment are very friendly, the price of oil is rising and could continue to rise due to the current market situation. These growing inflationary risks have triggered record speculations on rising yields in derivative markets. Most recently, worries of faster rising interest rates caused an accelerated rise in the US dollar.
Therefore, the many warnings in the media of impending difficulties are not unfounded. But the “Volatility Crash” in February, the difficulties in emerging markets, Europe’s worries about Italy and the US-China trade wars have already taken out some exuberance of the market. The remaining high valuation of shares can be seen in connection with the still very low interest rates. Therefore, an increased volatility is very likely.
At the moment, the main risks are in the bond and credit markets with potential consequences for the economy and stocks alike. We remain cautiously invested.