Buoyant markets need to keep an eye on four risk factors

FINANCIAL markets have started the new year in a buoyant mood, bolstered by an elusive alignment of stronger global growth prospects, falling inflation and less hawkish central banks. The broad-based rally in asset prices and the resulting loosening of financial conditions have opened the way for issuers to tap the capital markets for funding at quite attractive levels relative to those in 2022.

The sustainability of this encouraging configuration is not yet assured, however. Four issues in particular require close monitoring by investors.

The rally in stocks and bonds has been breathtaking so far this year. In just the first two weeks, the more volatile Nasdaq Composite index has gained 5.9 per cent, while the S&P 500 Index and the Dow Jones Industrial Average have risen 4.2 per cent and 3.5 per cent respectively. The prices of US government bonds have continued to defy their long-term negative correlation with stocks, with the 10-year Treasury gaining 3 per cent so far this year. The Bloomberg Treasury index is up 2.3 per cent, and the broader aggregate bond index is up 2.7 per cent, both with relatively shorter duration.