Bond and equity markets’ downward rally intensified on Friday amid signs of escalation of the conflict in Ukraine. The two sides of the conflict have moved to raise the stakes, Russia is going to hold referendums in the occupied territories while the EU is going to accelerate for the introduction of a energy price cap (which may have a reaction from Russia in the form of export duties on energy), investors brace for a recession in the EU and the UK anticipating a surge in government borrowing and spending intended to smooth the impact of the energy shock, and are therefore dumping sovereign debt. Yield on UK 10-year bond have risen by nearly 1% since early September:

At the same time, the pound sterling fell by almost 2% on Friday to 1.1050. The pound has become much more vulnerable to a fall after the Bank of England decided on Thursday to raise rates by just 50 basis points, well behind the Fed or the ECB in the tightening race. Adding to the negative news, the Monetary Policy Committee was in favor of an even smaller rate increase, by only 25 bp. UK sovereign debt is rapidly becoming unattractive to investors.

The growth of fears of a recession in the world is best seen in the dynamics of the commodity market. Oil quotes collapsed on Friday by an average of 5% on expectations of a slowdown in demand for energy. WTI is trading below $80 a barrel, the lowest level since January.

Goldman Sachs cut its year-end target for the S&P 500 by 16% to 3,600. The Bank’s analysts believe that a “hard landing” of the economy (lowering inflation due to a recession) is inevitable and that investors need to focus on the magnitude, duration and timing of the recession. Most fund managers surveyed by Goldman Sachs believe that in order to quell inflation, the Fed will need to raise rates to levels that will trigger a recession in 2023.

Bank of America, in turn, warned that the worst outflow experienced by the global sovereign debt market since 1949 has dramatically increased the likelihood of defaults and forced liquidations in crowded trades with investors.

Based on EPFR data, BoFA reported that investors withdrew $6.9 billion from sovereign debt funds in the week ending Wednesday. Equity funds posted a $7.8 billion outflow. At the same time, investments in cash grew by $30.3 billion. Investor expectations have fallen to their lowest level since the 2008 financial crisis.