The gold price surged to near-record heights, rising to US$2,002 amid renewed fears of an escalation in the Israel–Hamas conflict as Israeli forces prepare a ground assault.
Similarly, crude oil prices lifted to over US$90 a barrel after inflammatory rhetoric from senior political figures in the Middle East stoked fears of a spillover.
These geopolitical headwinds have been compounded by broader expectations of a “higher for longer” monetary policy tightening strategy from global central banks as the battle against inflation continues.
As such, 10-year bond yields have remained elevated, with US Treasury bonds closing at 4.84 per cent on Friday (27 October) and Australian government bonds hitting a high of 4.89 per cent on Monday (30 October).
Equities under pressure as corporate outlook darkens
Conversely, equity markets have continued to underperform, with the US Dow Jones index falling 1.1 per cent on Friday and 1.74 per cent over the past week despite evidence of sustained disinflation and expectations for a pause to the Federal Reserve’s hiking cycle.
In Australia, the All Ordinaries Index lost 0.77 per cent of its value on Monday and is down just under 1 per cent over the past week.
The subdued start to the week was partly driven by the latest retail sales figures from the Australian Bureau of Statistics (ABS), which added to fears of a protracted fight to return inflation to the 2–3 per cent target range.
Retail sales grew 0.9 per cent in September, tripling market expectations of a 0.3 per cent increase, and well above the 0.2 per cent rise in August.
According to ANZ Research, the retail sales result supports expectations for a hike to the cash rate at the Reserve Bank of Australia’s (RBA) next monetary policy board meeting on 7 November.
The higher interest rate environment is expected to weaken company earnings and increase credit quality risks.
Jim Cielinski, global head of fixed income at Janus Henderson Investors, said this environment elevates the risk of corporate debt defaults.
“The credit cycle tends to turn only if three conditions are present: high debt loads, lack of access to capital, and an exogenous shock to cash flow,” he observed
“These conditions [are] all present today: the yield curve is inverted, lending standards are tightening, and central bank policy globally has been aggressively moving tighter.
“Each cycle is different, but a combination of high debt levels and a higher-for-longer interest rate environment is putting pressure on companies to service that debt while cutting off access to capital at a reasonable price. In such an environment, active security selection is critical.”
AMP Capital chief economist Shane Oliver has said he expects headwinds in the Australian share market to persist over the near term.
As for what this means for the Australian share market, Mr Oliver said the near-term outlook is grim.
“The next 12 months are likely to see a further easing in inflation pressure and central banks moving to get off the brakes,” he said.
“This should make for reasonable share market returns, provided any recession is mild. But for the near-term, shares are at high risk of a further correction given high recession and earnings risks, the risk of higher-for-longer rates from central banks, rising bond yields which have led to poor valuations and the uncertainty around the war in Israel.”