Global equity markets could be vulnerable in the short run if oil prices and bond yields keep rising, suggests BCA Research.

In a research note, the firm says that global stock markets have advanced this year on the back of growing optimism about the economic outlook. “However, the flip-side of the improving growth outlook is rising bond yields and a re-kindling of the energy bull market, which historically have been headwinds for equities,” it points out.

This year, 10-year bond yields are up more than 50 basis points for the G7 countries and are at their highest level in nearly two years, BCA says. “Although, encouragingly, inflation expectations remain in check.”

“Meanwhile, crude oil prices are flirting with record highs, in part reflecting investor concerns about U.S.-Iranian tensions and a possible disruption to global oil supplies,” it adds.

“While we remain upbeat about stocks on a 6 to 9 month basis, some near-term turbulence is likely if interest rates and oil prices keep climbing,” the firm concludes.