According to BlockBeats, on May 25, while the focus of global markets remained on the US-Iran negotiations and the reopening of the Strait of Hormuz, funds were beginning to pay attention to a deeper issue: when high inflation, high interest rates, and sovereign debt risks coexist, can global central banks still maintain market stability as they have for the past decade?
While a US-Iran agreement is gradually emerging, including provisions for a limited reopening of the Strait of Hormuz, a 60-day framework agreement, and the resumption of nuclear negotiations, significant differences remain between the two sides on core issues such as highly enriched uranium, the lifting of sanctions, the unfreezing of assets, and the Lebanese front. This indicates that although the market has begun trading on a "de-escalation" of the conflict, funds have not truly returned to a fully risk-averse mode.
More importantly, the market is now witnessing another phenomenon rarely seen in the past two years—"interest rate hike expectations have returned." The US interest rate futures market has begun pricing in a Fed rate hike as early as October, fully pricing in a 25 basis point increase by the end of the year. Fed Governor Waller has explicitly stated that if inflation expectations lose their anchor, the Fed will still need to raise interest rates; the European Central Bank has even begun discussing the possibility of a June rate hike. This means that the market's original expectation of a "rate cut to save the market" narrative is being replaced by a renewed focus on "high interest rates for a long period."
The real core issue behind this is that the global bond market is beginning to rebel against the logic of "central banks always bailing out" that has prevailed for over a decade. El-Erian actually points out the biggest risk at present: In the past, whether it was a financial crisis, a pandemic, or a war, the market believed that central banks would ultimately rescue risky assets through interest rate cuts, quantitative easing, and fiscal stimulus, thus making "buying on dips" the most successful trading strategy globally. But now, high inflation, high debt, and sovereign credit pressures are beginning to limit the ability of central banks to intervene, and the market is facing for the first time a situation where "policies want to rescue, but may not be able to."
This is also the reason for the recent huge divergence in global assets. On the one hand, US AI and technology stocks remain high due to liquidity inertia and growth expectations; on the other hand, US Treasury yields, Japanese long-term bonds, and European bond markets have all begun to fluctuate sharply. This indicates that funds are reassessing: if central banks can no longer provide unlimited liquidity in the future, then all currently overvalued assets will face renewed pressure from "real interest rates" and "discounted cash flows."
In the crypto market, BTC will continue to be supported in the short term by the recovery in risk appetite due to the easing of tensions in the Middle East. However, if the global interest rate market continues to reflect interest rate hike expectations again, highly leveraged and overvalued assets will still face liquidity contraction pressure. The biggest variable in the market right now is no longer just war, but whether the influence of global policy tools on the market is beginning to decline.
