The selloff in global stocks and high-yield bonds this month was just a dry run for what will come after the Federal Reserve winds down its bond purchases, according to UBS AG.
While the price declines appear to be a healthy adjustment rather than the start of a full-blown market correction, uncertainty about U.S. interest rates remains a significant source of concern, Larry Hatheway, the London-based chief economist at UBS’s investment bank, wrote in a report today.
Investors offloaded risky assets this month in a selloff reminiscent of the so-called ‘taper tantrum’ of May 2013, when former Fed Chairman Ben S. Bernanke said the central bank will begin scaling back its monthly asset-purchase program. The Stoxx Europe 600 Index lost three percent in the first week of August, while yields on U.S. junk bonds rose to a 10-month high of 5.94 percent, according to data compiled by Bloomberg.
“The main show is soon to arrive,” said Hatheway. “With the ‘taper’ nearly complete, there are fundamental and institutional reasons aplenty to fret that last summer’s ‘taper tantrum’ will be find its sequel. Beware ‘rate rage.’”
Policy makers’ divided views on the direction and timing of interest rates will increase uncertainty in the final months of 2014, according to Hatheway. Falling unemployment may also push up labor costs, stoking concerns about inflation, he wrote.