Making sense of a cross-asset disconnect

Key points: • A persistent oil shock implies higher inflation and weaker growth, but risk assets appear unfazed, with equities and credit spread performance diverging from the caution implied by government bonds. • Rates markets appear more consistent with historical precedents during oil supply shocks than risk assets, suggesting investors are still assigning significant probability to a less friendly near-term trade-off between growth and inflation risks. • Higher starting yields have strengthened the case for high quality fixed income, with key metrics showing bonds offer relative appeal...