Equity markets could come under further pressure ahead of a U.S. Federal Reserve rate hike, according to UBS Global Research.
In an analysis note, UBS said bond markets are increasingly reflecting the potential for growth to accelerate in the U.S., thereby giving the Fed more wriggle room to resume tightening.
"Over the last two weeks, two- year (bond) rates jumped from 0.7 percent to 0.9 percent roughly. Stronger growth leading rates higher and curves steeper is a key component of our views," UBS said.
However, for the move to stick, UBS stresses that the equity markets also need to rally. However, stocks around the world, reeling from plunging commodity prices, weaker-than-expected corporate earnings results and political events, seem fearful of an earlier-than-expected hike.
UBS warns that the next hike may not trigger as much of an explosion in financial conditions, especially if the Fed is patient enough until a rebound in global growth limits dollar strength.
"Less dollar strength would support oil prices. And less oil weakness would also reduce the downside in US credit. But we are not there yet: markets are still quite pessimistic on growth outside the US, given the ongoing weakness in China-growth-sensitive asset," the research said, adding, that if the Fed forced rate hikes, there is a risk of sell-off in risky assets which could deliver tightening equivalent to a full cycle.