LONDON Markets are on the alert to which sectors will buckle under the sharpest jump in interest rates in decades, with big rate moves this month in Britain and Norway a reminder that the tightening is not over.
Central banks may need longer to lower inflation and a fresh bout of financial turbulence could make the process even more protracted, the International Monetary Fund warns.
Stability has returned since March's banks turmoil, but warning lights are flashing elsewhere and tensions in Russia provide another possible trigger for stress.
Here is a look at some of the pressure points.
1/ REAL ESTATE: PART 1
Just as hopes for an end to Federal Reserve rate hikes boost the U.S. housing market, European residential property is suffering under rate hikes.
UK rates have jumped to 5% from 0.25% two years ago and 2.4 million homeowners will roll off cheap fixed rate mortgages onto much higher rates by end-2024, banking trade body UK Finance estimates.
Sweden, where rates rose again on Thursday, is one to watch with most homeowners' mortgages moving in lockstep with rates.
London Business School economics professor Richard Portes said, euro zone housing markets appear to be "freezing up" as transactions and prices fall. "You can expect worse in 2024 when the full effects of rate hikes come forth," he said.
2/ REAL ESTATE: PART 2
Having taken advantage of the low rates era to borrow aplenty and buy up property assets, the commercial real estate sector is grappling with higher debt refinancing costs as rates rise.
"The single most important thing is interest rates. But not just interest rates; what it is equally important is the predictability of rates," said Thomas Mundy, EMEA head of capital markets strategy at real estate firm JLL.
"If we were settled on an interest rate, real estate prices could adjust. But at the moment, the lag in the adjustment to real estate pricing is creating an uncertain environment."
In Sweden, high debts, rising rates and a wilting economy has produced a toxic cocktail for commercial property.
And HSBC's decision to leave London's Canary Wharf for a smaller office in the City highlights an office downsizing trend rocking commercial real estate markets.
3/ BANK ASSETS
Banks remain in focus as credit conditions tighten.
"There is no place to hide from these tighter financial conditions. Banks feel the pressure of every central bank," said Lombard Odier Investment Managers' head of macro Florian Ielpo.
Banks hold two types of balance sheet assets: those meant for liquidity and those that work like savings meant to earn additional value. Rising rates have pushed many of these assets 10%-15% lower than their purchase price, Ielpo said. Should banks need to sell them, unrealised losses would emerge.
Most at risk are banks' real estate assets. Federal Reserve chief Jerome Powell says the Fed is monitoring banks "very carefully" to address potential vulnerabilities.
Lending standards for the average household are also a concern. Ielpo expects consumers will stop paying loan payments in the third and fourth quarters.
"This will be the Achilles heel of the banking sector," he added.
4/ DEFAULT
Rising rates are taking a toll on corporates as the cost of their debt balloons.
S&P expects default rates for European sub-investment grade companies to rise to 3.6% in March 2024 from 2.8% this March.
Markus Allenspach, head of fixed income research at Julius Baer, notes there were as many defaults globally in the first five months of 2023 as there were during 2022.
French retailer Casino is in debt restructuring talks with its creditors. Sweden's SBB has been fighting for survival since its shares plunged in May on concern over its financial position.
"We are starting to see distress building up in the corporate space, especially at the low end where you have most floating rate debt," said S&P Global Ratings' Nick Kraemer.
5/ RUSSIA AFTER WAGER MUTINY
The Wagner mutiny, the gravest threat to Russia's Vladimir Putin's rule to date, might have been aborted, but will long reverberate. Any changes to Russia's standing - or to the momentum behind the war in Ukraine - could be felt near and far.
There's the immediate fallout for commodity markets from crude oil to grains, the most sensitive to domestic changes in Russia. And knock on effects, from inflation pressures to risk aversion in case of a major escalation, could have far reaching consequences for countries and corporates already feeling the heat from rising rates.
"Putin can no longer claim to be the guarantor of Russian stability and you don't get that kind of fragmentation and challenges to the system in a stable and popular regime," said Tina Fordham, geopolitical strategist and founder of Fordham Global Foresight.
(Reporting by Chiara Elisei, Naomi Rovnick, Nell Mackenzie and Karin Strohecker, Graphics by Vincent Flasseur, Kripa Jayaram, Sumanta Sen and Pasit Kongkunakornkul, Editing by Dhara Ranasinghe and Alison Williams)
