The market wisdom from pop culture

“Isn’t it ironic, don’t you think?” – this is an iconic lyric from Alanis Morissette’s song ‘Ironic’, released back at the end of the last century. The song is essentially about situations being interpreted ‘in context’, meaning an event can be seen as ‘good’ in some situations, but ‘bad’ in others. Today, the global financial markets are witnessing a remarkably similar twist in perspective.

When ‘good news’ is bad news

During the quantitative easing (QE) era, which was not so long ago, investors grew accustomed to the expression “good news is bad news”. This meant that strong economic data was viewed negatively because it signalled that central banks would look to tone down QE, leading to less liquidity, and therefore creating a negative environment for risky assets.

In the post-QE era, there was initially a narrative of a growth-focused environment, where stocks and bond yields usually moved together in harmony – a “good news is good news” regime for equities. However, that dynamic changed rather abruptly recently. The ongoing Middle East conflict has made inflation the market’s main focus again, resurrecting the old irony. We are back in a situation where resilient economic data could hurt equities, prompting stocks and yields to move in opposite directions. Consequently, a positive economic surprise is no longer a blessing.

Since the Middle East conflict began in late February, US data has proved more resilient than expected, and economic surprises have rebounded through May. This helps explain why, in recent weeks, bond yields have risen sharply, and have therefore hurt bond prices, as growth and inflation have both held up better than when rate cuts were priced in.

Does that mean if we simply avoid bonds, we will get through this rough patch unscathed? Not exactly.

The six degrees of separation

Many of you are likely familiar with the concept of “the six degrees of separation” – the idea that any two people in the world, or in this case, seemingly unrelated financial matters, are linked by six or fewer social connections.

In the modern finance world, given the deep inter-connectedness of investment instruments, it is nearly impossible for one asset class to remain immune to factors affecting another asset class. For equity investors, this means that rising bond yields can lead to a higher discount rate being used to value equities – a shift that would directly impact equity prices.

This interconnected reality poses a challenge to fundamental, real-world supply chain connections as well. Take, for example, the key theme of AI. The ongoing Strait of Hormuz closure and energy shock are increasingly challenging the optimism around AI. While major chipmakers have indicated they possess enough inventory of critical inputs to last them a few months – an assumption that market participants have relied on since the breakout of the Middle East conflict – the prolonged conflict now raises serious questions. Markets are growing concerned about the future supply of critical materials, such as helium and sulphuric acid, and the ability of large tech companies to continue to absorb rising costs.

Furthermore, higher energy prices imply more expensive capex and potential deployment delays, impacting suppliers and regions hosting AI clusters. Over the medium term, the main concerns revolve around the likelihood of a drop in investment spending on AI. Historically, oil shocks have lowered the rate of technology adoption by firms because companies faced with skyrocketing operating costs inevitably cut back on tech-related investment, subsequently dragging down productivity growth.

“There must be some way out of here”

Markets are still trying to estimate the size of the next inflation wave. Recent moves in the US 30-year Treasury yield indicate a magnifying sensitivity of longer-dated bonds to oil prices. But, as Bob Dylan wrote in the lyrics of ‘All Along the Watchtower’, there surely must be some kind of way out of this situation, right?

The ‘cleanest solution’ is a sharp, genuine conflict de-escalation.

Interestingly, the US bond market is also US President Trump’s Achilles’ heel. Rising long-end yields can directly increase the cost of financing the US government’s growing deficit, complicating Trump’s fiscal plans, including proposed tax cuts. Such sharp yield spikes can force course corrections, much like in 2025, when tariff-driven volatility briefly rattled US Treasuries.

The above scenario remains our base case, and we expect some form of conflict resolution in the coming weeks. This can lead to a situation similar to the 2025 Liberation Day, where bond yields spiked temporarily and then came off.

However, if the status-quo persists, we may experience more pain in risky assets before the markets naturally ‘self-regenerate’ – a scenario where stubborn inflation would eat into consumer spending, leading to slower growth, which would in turn finally start to apply downward pressure on inflation.

If the market must endure a painful growth slowdown just to cure inflation woes, it would be a great financial irony – proving that, in today’s times, risky asset performances remain, to a major extent, at the mercy of context.