European equities have opened mixed this morning, following one of the sharpest sessions of selling seen for weeks. Concerns over the market’s belief that interest rates are set to rise in line with a sell-off in the bond market has spooked equity investors into demanding a greater risk premium. Claimant count figures from the States yesterday strengthened the notion that the Fed will begin to taper its asset purchases in September.
And what if they do?
The market will likely hate it to begin with, withdrawing cash quickly from bond-like stocks that have delivered excess returns. Risk assets in general will probably get a hammering initially, spiking volatility. But this effect could be limited.
So long as inflation remains stable and 10yr paper unattractive, the equity market could return to normal. And since the Fed is only likely to taper at the helm of a strengthening economy, consumer spending and credit could support fundamentals and drive prices further after any initial shock. But all of that, sadly, could be wishful thinking. The market might love cheap, guaranteed money more than a healthy economy.