Investors should brace for a 10% correction in the financial markets over the next few weeks, says deVere CEO Nigel Green.
Green’s warning comes as major central banks continue their battle to try and tame inflation and differing signals from stock and bond markets.
He says: “We expect the US Federal Reserve will raise interest rates once again at its upcoming May meeting; the Bank of England’s chief economist has hinted at a further interest rate rise next month; and a half-point interest rate increase can’t be ruled out for the European Central Bank’s meeting next week.
“This is likely to cause jitters in the market as some investors, concerned about short-term profits, will move into panic-selling mode.”
Green says investors will also have concerns that further rate hikes now, when changes can take up to 18 months to take full effect, could lead economies into recession.
While stocks markets are currently enjoying a rally, core major bond markets continue to be marked by inverted yield curves, says Green.
Green says: “We’ve seen solid gains on all the major stock markets, over the last month.
While stock market volatility has fallen and investors appear to be seeing beyond the current interest rate cycle, and its likely impact on company earnings, and looking ahead to the next upswing in the economic cycle, in contrast, the bond market is very much focused on the interest rate cycle, with yield curves inverted in the US, UK and Eurozone. Longer term lending rates are below the overnight rates set by central banks, he says.
“This reflects fear that the final rounds of interest rate hikes, from the major central banks this spring and summer, may tip economies into recession.”
According to Green, the stark disconnect between stocks and bonds suggests that investors should brace themselves for significant volatility in global financial markets over the next few weeks, with a 10% correction a possibility.
He adds: “We expect that we’re currently in the ‘calm before the storm’ phase. That said, a market correction is a natural part of the market cycle and can present major buying opportunities for long-term investors who are willing to weather short-term volatility.”
