Is the Long-Running Equity Bull Market Over? Asia Braces for Reversal of Fortune

The Dow Jones Industrial Index fell 665 points on February 2, capping its worst week in two years and then fell another 1,175 points at the end of the trading day on February 5, after an intra-day loss of of neraly 1,600 points.

Other markets also tumbled, including those in Europe and Asia. Japan's Nikkei continued the rout on February 5, slumping by 2.25% while Singapore's Straits Times Index and Hong Kong's Hang Seng Index slid by 1.33% and 1.09%, respectively. Global markets have now erased all gains made in 2018.

Analysts blamed the abrupt rise in the yield of ten-year US Treasury bonds, which spiked to 2.8% from 2% or lower in the past two years. The fear that interest rates would rise faster and higher than signaled by the US Federal Reserve further intensified with the release of the latest US jobs report, which showed non-farm payrolls rising by 200,000 in January, higher than the 180,000 expected.

"The balance of risks suggest inflationary expectations should continue to rise and the markets are likely to get more bearish on short-term rates, thus raising the long-term yields even more," warns Southeast Asian investment bank RHB in a report.

But like many other analysts, RHB is maintaining its optimistic long-term view of the world's real economies. "The strong economic data in both the US and China implies that the world economy continues to expand," it argues. 

But higher-than-expected interest rates would have an impact on corporate funding costs, putting companies on notice that they need to get their funding ducks in a row sooner rather than later. The Fed has signaled that it will raise US interest rates in 2018, but while six officials on the Federal Open Market Committee predicted two hikes or fewer, another six expect to increase three times while four anticipate at least four times.

Still, the fact that the anticipated rate increases are due to a strong job market and the need to get ahead of inflation should comfort CFOs. Corporate financial management will get trickier, including foreign exchange movements and the cost of financing, but domestic and overseas consumer demand and business investment should hold up -- unless policymakers fumble, a global trade war erupts or other unexpected events occur, such as war in the Korean peninsula or the Middle East.