Online stockbroker Colfinancial.com said the local stock market risks a contagion should the US suffer a recession as warned by its rising long-term bonds.
“The sharp rise in US long term bond rates is the biggest risk facing the market right now. Since the end of June, the 10-year bond rate has increased by 101 basis points and is now at 4.85 percent, the highest it has been since 2007,” Colfinancial.com said.
“Aside from the greater risk of defaults and weaker economic growth, the latest increase in bond rates is worrisome because higher rates are led by longer term bonds. Although the 2-year bond rate is up by 31 basis points since end of June, the increase is much less than the 101 basis points increase in the 10-year bond rate and the 106 basis points increase in the 30-year bond rate,” it added.
Colfinancial.com said the steepening of the yield curve “could be a harbinger of an upcoming recession and bear market in stocks.”
It noted that in 2001 and 2007, longer term bond rates increased after the yield curve initially inverted, followed shortly by a recession and a bear market.
“If US stocks enter a bear market, Philippine stocks could also go down. This as the Philippines has always suffered from a contagion during past bears markets,” it said.
“Admittedly, there is a possibility that the Fed may no longer increase rates in November. However, neither will rates go down,” it added.
Colfinancial.com said the ongoing war between Israel and Hamas might keep oil prices elevated, preventing inflation and interest rates from going down more significantly in the near term.
“Moreover, even if the Fed decides to stay on hold, interest rates in the US are already elevated. Although the economy has remained resilient so far, growth could eventually slow down as the lag effect of high interest rates kick in,” it said.
At the same time, the Philippine Central Bank may also raise rates when it meets in November, with the likelihood greater after inflation accelerated to 6.1 percent in September, beyond estimates.
“Given the numerous risks facing equity markets, there is a greater chance that local stocks will remain weak in the short term,” Colfinancial.com said.
