Global Financial Markets

Higher government debt is becoming a problem in more and more countries, and the markets are now sending a clear signal about it: long-term interest rates are rising. Those rates actually need to come down, because with today's mountains of debt, refinancing at higher levels only makes the situation more precarious. In this report we explain how that could be achieved and what this means for the key interest rate, currency, and equity markets.

The stock markets and the economy have been running on credit: companies are borrowing heavily to invest in AI, while investors increasingly buy shares with borrowed money, driving prices even higher. The resulting rise in share values then serves as collateral for loans used throughout the economy. As long as oil prices and inflation keep rising and central banks are forced to raise interest rates, this self-reinforcing mechanism becomes increasingly vulnerable, at a time when monetary and fiscal policy have little room left to intervene.

The tightness in the market for oil products (diesel, petrol) is greater than the prices of Brent and WTI would suggest. This also means that the inflationary risks associated with a closure of the Strait of Hormuz are greater, and this, in turn, will play a major role in central banks’ interest rate policy. In this report, we explain why this is the case and what it means for key interest rates, exchange rates and equity prices.