Odds look stacked against risky assets

Aside from the US stock market – which is being propped up by a handful of big name stocks and a serious dose of AI fever – most risky assets have struggled over the past month or so. We don’t think that owes much to the back-and-forth swings in sentiment around the US debt ceiling. Instead, we think two key, opposing, forces have been at play. One is the continued resilience of US activity data, which have suggested the economy might avoid a recession. The other is the pressure this puts on the Fed to keep policy tight, prompting investors to re-embrace the ‘higher for longer’ narrative. Over the past month or so, the latter force seems to have dominated, partly because it puts downward pressure on valuations but perhaps also because it raises the risk of the US economy buckling under higher rates further down the line.