Inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. It can occur for a variety of reasons, such as an increase in demand or a decrease in supply, and it is typically measured using the consumer price index (CPI) or the producer price index (PPI). Inflation can have significant impacts on an economy, including decreasing purchasing power, reducing the value of savings, and distorting resource allocation. Central banks typically try to maintain low and stable inflation through various monetary policies, such as adjusting interest rates or engaging in open market operations.

The current economic cycle is proving to be particularly challenging to categorise, with unique circumstances creating a two-speed economy. Depending on which economic indicators are examined, the US economy could be categorised as being in any one of the business cycle’s four phases. The unemployment rate is at a multi-decade low, suggesting an economy in its expansion phase, but other indicators such as business surveys and the rate of change in inflation suggest an economy already experiencing stagflation.

The invasion of Ukraine by Russia has increased uncertainty in the market, with potential consequences for millions of people. While the assumption is that the response will be tougher sanctions, the major unknown is how the Ukrainians and the Western powers will react. The crisis has broader implications beyond emerging markets, particularly for Europe's reliance on Russian energy.

With the Federal Reserve's plans to reduce bond purchases and raise interest rates in 2022, investors are concerned about the potential impact on equity valuations. However, not all markets will react in the same way to changes in bond yields, so investors should take note of these differences. The article examines the impact of rising US bond yields on global stock markets and how different regions and sectors respond to changes in bond yields, providing insights for investors who have the flexibility to tactically adjust their global asset allocation.

Amid the COVID-19 pandemic, bond markets are exhibiting extreme and sometimes counter-intuitive behaviors. With government bonds selling off at the same time as riskier assets, the market is telling you that lower rates are not the answer. Although opportunities have arisen in fixed income, investors should be wary of passive exposure to the high yield market and take a selective and cautious approach to separate the ongoing risks from the opportunities.