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JPMorgan’s Marko Kolanovic is bracing for a 20% sell-off to hit the S&P 500.
According to the Institutional Investor hall-of-famer, high interest rates are creating a breaking point for stocks — and choosing cash at a 5.5% return in money market and short-term Treasurys is a key protection strategy right now.

“I’m not sure how we’re going to avoid it [recession] if we stay at this level of interest rates,” the firm’s chief market strategist and global research co-head told CNBC’s “Fast Money” on Thursday.
The S&P 500 closed at 4,258.19 on Thursday and is on the cusp of a five-week losing streak. The index is down more than 5% over the past month.
Kolanovic believes the weakness isn’t a strong sign a monster move lower is already here. He indicates a near-term bounce is still possible because a lot hinges on economic reports over the next few months.
“[We’re] not necessarily calling for an immediate sharp pullback,” he said. “Could there be another five, six, seven percent upside in equities? Of course… But there’s a downside. It could be 20% downside.”

Arrows pointing outwards

He warns the “Magnificent Seven” stocks, which includes Apple, Amazon, Meta, Alphabet, Nvidia, Tesla and Microsoft, are among the most vulnerable to steep losses due to their historic gains amid high rates. The group is up 83% so far this year — carrying the bulk of the S&P 500’s gains.

“If there’s a recession, I think the magnificent [seven]… will catch down where the rest is,” said Kolanovic, citing beaten-up sectors including consumer staples and utilities.
Plus, Kolanovic believes consumers are getting dangerously cash strapped due to the economic backdrop.
“The job market is still strong. But you are starting to see the stress in [the] consumer if you look at sort of the delinquencies in the [credit] cards and auto loans,” he noted. “We remain somewhat negative still.”
Kolanovic, Institutional Investor’s top-ranked equity strategist, came into the year with an S&P 500 year-end target of 4,200. The index closed 2022 at 3,839.50.
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At the center of the storm of this week’s market turmoil is the 10-year Treasury yield, one of the most influential numbers in finance.
The yield, which represents borrowing costs for issuers of bonds, has climbed steadily in recent weeks and reached 4.8% Tuesday, a level last seen just before the 2008 financial crisis.
“Unfortunately, I do think there has to be some pain for the average American now,” said Lindsay Rosner, head of multi sector investing at Goldman Sachs asset and wealth management.

Federal Reserve Board Chair Jerome Powell speaks during a news conference following a Federal Open Market Committee meeting at the Federal Reserve in Washington, D.C., on July 26, 2023.
SAUL LOEB | Getty

Violent moves in the bond market this week have hammered investors and renewed fears of a recession, as well as concerns about housing, banks and even the fiscal sustainability of the U.S. government.
At the center of the storm is the 10-year Treasury yield, one of the most influential numbers in finance. The yield, which represents borrowing costs for issuers of bonds, has climbed steadily in recent weeks and reached 4.8% on Tuesday, a level last seen just before the 2008 financial crisis.

The relentless rise in borrowing costs has blown past forecasters’ predictions and has Wall Street casting about for explanations. While the Federal Reserve has been raising its benchmark rate for 18 months, that hasn’t impacted longer-dated Treasurys like the 10-year until recently as investors believed rate cuts were likely coming in the near term.
That began to change in July with signs of economic strength defying expectations for a slowdown. It gained speed in recent weeks as Fed officials remained steadfast that interest rates will remain elevated. Some on Wall Street believe that part of the move is technical in nature, sparked by selling from a country or large institutions. Others are fixated on the spiraling U.S. deficit and political dysfunction. Still others are convinced that the Fed has intentionally caused the surge in yields to slow down a too-hot U.S. economy.
“The bond market is telling us that this higher cost of funding is going to be with us for a while,” Bob Michele, global head of fixed income for JPMorgan Chase’s asset management division, said Tuesday in a Zoom interview. “It’s going to stay there because that’s where the Fed wants it. The Fed is slowing you, the consumer, down.”

The ‘everything’ rate

Investors are fixated on the 10-year Treasury yield because of its primacy in global finance.
While shorter-duration Treasurys are more directly moved by Fed policy, the 10-year is influenced by the market and reflects expectations for growth and inflation. It’s the rate that matters most to consumers, corporations and governments, influencing trillions of dollars in home and auto loans, corporate and municipal bonds, commercial paper, and currencies.

“When the 10-year moves, it affects everything; it’s the most watched benchmark for rates,” said Ben Emons, head of fixed income at NewEdge Wealth. “It impacts anything that’s financing for corporates or people.”

The yield’s recent moves have the stock market on a razor’s edge as some of the expected correlations between asset classes have broken down.
Stocks have sold off since yields began rising in July, giving up much of the year’s gains, but the typical safe haven of U.S. Treasurys has fared even worse. Longer-dated bonds have lost 46% since a March 2020 peak, according to Bloomberg, a precipitous decline for what’s supposed to be one of the safest investments available.
“You have equities falling like it’s a recession, rates climbing like growth has no bounds, gold selling off like inflation is dead,” said Benjamin Dunn, a former hedge fund chief risk officer who now runs consultancy Alpha Theory Advisors. “None of it makes sense.”‘

Borrowers squeezed

But beyond investors, the impact on most Americans is yet to come, especially if rates continue their climb.
That’s because the rise in long-term yields is helping the Fed in its fight against inflation. By tightening financial conditions and lowering asset prices, demand should ease as more Americans cut back on spending or lose their jobs. Credit card borrowing has increased as consumers spend down their excess savings, and delinquencies are at their highest since the Covid pandemic began.
“People have to borrow at a much higher rate than they would have a month ago, two months ago, six months ago,” said Lindsay Rosner, head of multi sector investing at Goldman Sachs asset and wealth management.
“Unfortunately, I do think there has to be some pain for the average American now,” she said.

Retailers, banks and real estate

Beyond the consumer, that could be felt as employers pull back from what has been a strong economy. Companies that can only issue debt in the high-yield market, which includes many retail employers, will confront sharply higher borrowing costs. Higher rates squeeze the housing industry and push commercial real estate closer to default.
“For anyone with debt coming due, this is a rate shock,” said Peter Boockvar of Bleakley Financial Group. “Any real estate person who has a loan coming due, any business whose floating rate loan is due, this is tough.”
The spike in yields also adds pressure to regional banks holding bonds that have fallen in value, one of the key factors in the failures of Silicon Valley Bank and First Republic. While analysts don’t expect more banks to collapse, the industry has been seeking to offload assets and has already pulled back on lending.
“We are now 100 basis points higher in yield” than in March, Rosner said. “So if banks haven’t fixed their issues since then, the problem is only worse, because rates are only higher.”

5% and beyond?

The rise in the 10-year has halted in the past two trading sessions this week. The rate was 4.71% on Thursday ahead of a key jobs report Friday. But after piercing through previous resistance levels, many expect that yields can climb higher, since the factors believed to be driving yields are still in place.
That has raised fears that the U.S. could face a debt crisis where higher rates and spiraling deficits become entrenched, a concern boosted by the possibility of a government shutdown next month.
“There are real concerns of ‘Are we operating at a debt-to-GDP level that is untenable?'” Rosner said.
Since the Fed began raising rates last year, there have been two episodes of financial turmoil: the September 2022 collapse in the U.K.’s government bonds and the March U.S. regional banking crisis.
Another move higher in the 10-year yield from here would heighten the chances something else breaks and makes recession much more likely, JPMorgan’s Michele said.   
“If we get over 5% in the long end, this is legitimately another rate shock,” Michele said. “At that point, you have to keep your eyes open for whatever looks frail.” More

Billionaire investor Ken Griffin’s flagship hedge fund rallied last month.
Citadel’s multistrategy flagship Wellington fund gained 1.7% in September.
The market has grown more volatile and fragile as investors grapple with a higher-for-longer interest rate regime.

Ken Griffin, founder and CEO of Citadel, at CNBC’s Delivering Alpha summit on Sept. 28, 2022.
Scott Mlyn | CNBC

Billionaire investor Ken Griffin’s flagship hedge fund rallied last month when the broader market was rattled by tight monetary policy as well as rising recession fears, according to a person familiar with the returns.
Citadel’s multistrategy flagship Wellington fund gained 1.7% in September, bringing its 2023 performance to 12.6%, the person said. The S&P 500 pulled back 4.9% last month, suffering its worst month of the year. The equity benchmark is still up 11% for the year.

The market has grown more volatile and fragile as investors grapple with a higher-for-longer interest rate regime. Stocks resumed the sell-off this week as the 10-year Treasury yield surged to a 16-year high. Many notable investors, including Pershing Square’s Bill Ackman, have warned of a deteriorating economy after a series of aggressive rate hikes.
Griffin, founder and CEO of Citadel, told CNBC last month he was skeptical that this year’s rally, powered mostly by artificial intelligence-related stocks, can be sustainable.
“I’m a bit anxious that this rally can continue,” Griffin said. “Obviously one of the big drivers of the rally has been … just the frenzy over generative AI, which has powered many Big Tech stocks. … We’re sort of in the seventh or eighth inning of this rally.”
Citadel’s equities fund, which uses a long/short strategy, was up 1.1% in September and 10.7% this year, while its global fixed income fund is 8.8% higher so far in 2023, the person said.
Citadel had $61 billion in assets under management as of Sept. 1. The Wellington fund soared 38% in 2022 for its best year ever. More

McDonald’s french fries being prepared.
Daniel Acker | Bloomberg | Getty Images

Check out the companies making headlines in midday trading.
Rivian Automotive — Rivian Automotive shares tanked 19% after the electric vehicle maker announced plans to raise $1.5 billion in convertible notes and offered preliminary third-quarter revenue guidance roughly in line with Wall Street’s expectations. Rivian said it anticipates revenue to range between $1.29 billion and $1.33 billion, versus the $1.3 billion forecast by analysts polled by LSEG, formerly known as Refinitiv.

Exxon Mobil — Shares slid more than 2.3% in midday trading following a further decline in oil prices on the back of an uncertain demand outlook and macroeconomic future.
Clorox — Shares dropped 7.7% on Thursday, one day after the product maker offered worse fiscal first-quarter guidance than analysts polled by FactSet expected. The company said a cyberattack overshadowed benefits from better pricing, cost reduction and supply chain improvements.
UWM Holdings — Shares popped 5.7% after the mortgage company was upgraded by BTIG to buy from neutral. The firm said UWM Holdings’ valuation doesn’t reflect upside from a potential stabilization in interest rates.
Orchard Therapeutics — Shares nearly doubled after Japanese pharmaceutical company Kyowa Kirin announced plans to acquire the biotechnology firm, which specializes in gene therapy, for $478 million.
Vestis — Shares dropped 4.8% after Redburn Atlantic initiated coverage of the uniform company with a buy rating and noted limited valuation downside, saying “risk reward for the stock appears asymmetric.” Vestis completed a spinoff from Aramark on Monday.

Oculis — Shares rose 3.4% after Stifel initiated coverage of the biopharma company with a buy rating and $35 target price. The investment bank cited Oculis’ pipeline of innovative technologies as a reason for the rating.
First Citizens BancShares — Shares gained 1% after Wedbush initiated the regional bank at an outperform rating, citing two recent acquisitions as catalysts for a positive outlook.
Live Oak Bancshares — Live Oak Bancshares added 4.2% after JPMorgan upgraded the stock to overweight and maintained a price target implying more than 40% upside over the next 12 months.
Carrier Global — Shares of the HVAC company dipped 1.3% after Bank of America downgraded Carrier to underperform from neutral. The bank cited slowing demand in Europe for heat pumps as one reason to be negative on the stock.
Johnson & Johnson — Shares of the health-care giant added 0.8% in midday trading after RBC initiated company coverage with an outperform rating. Analyst Shagun Singh noted further potential that has yet to be realized from Johnson & Johnson’s spinoff of Kenvue earlier in 2023.
Constellation Brands — Shares of the alcoholic beverage maker dipped more than 3% midday after Constellation reported sales of wine and spirits fell 14% on a year-over-year basis as well as an 8% decrease in depletions, an industry term for the number of cases sold to retailers by a distributor. Overall, however, the company topped analysts’ earnings and revenue expectations and raised its guidance for its fiscal 2024.
Lamb Weston — Lamb Weston shares jumped 10%. On Thursday, the french fry producer, which supplies McDonald’s, beat analysts’ expectations in its latest quarter on the top and bottom lines. It also raised its fiscal-year guidance. CEO Tom Werner cited solid demand and a favorable pricing environment for raising the fiscal-year guidance.
Instacart — Instacart fell 2.9% after Bernstein initiated coverage of the company at a market perform rating, noting that increased competition challenged the delivery company’s strong digital advertising business.
— CNBC’s Brian Evans, Alex Harring, Tanaya Macheel, Sarah Min, Jesse Pound, Pia Singh, Samantha Subin and Michelle Fox Theobald contributed reporting. More

People walk by electric truck maker Rivian’s newly opened storefront in the Meatpacking District of Manhattan on June 23, 2023 in New York City.
Spencer Platt | Getty Images

Check out the companies making headlines in premarket trading.
Rivian — Shares of the electric vehicle maker plunged 8.7% after Rivian announced a $1.5 billion convertible bond sale and issued disappointing guidance for the third quarter. The company said it expects between $1.29 billion and $1.31 billion in revenue, while analysts polled by StreetAccount forecast $1.31 billion. Rivian also reported its cash and short-term investments lessened between the end of the second and third quarter.

Energy stocks — Shares of oil firms Occidental Petroleum, Chevron and ExxonMobil were all lower in premarket trading, as crude prices added to Wednesday’s steep declines. Occidental ticked down 0.4%, while Chevron and ExxonMobil both pulled back around 1%.
Clorox — Shares slipped 4.4% in premarket trading Thursday, a day after the product maker offered weaker guidance for the fiscal first quarter than analysts expected. The company also said a cyberattack outweighed benefits from pricing, cost saving and supply chain improvements. Raymond James downgraded the stock to market perform from outperform following the guidance.
UWM Holdings — Shares of the mortgage company rose 4.3% in premarket trading after a BTIG upgrade to buy from neutral. BTIG said the valuation for the parent company of United Wholesale Mortgage does not reflect the upside from a potential stabilization in interest rates.
Orchard Therapeutics — The gene therapy stock soared more than 98% on news that the company would be acquired by Japanese pharmaceutical Kyowa Kirin for $478 million.
Vestis — Shares of the uniform company added 2.4% after Redburn Atlantic initiated coverage of the company with a buy rating. Analyst Oliver Davies noted limited valuation downside and forecast 75% upside. Vestis completed a spinoff from Aramark on Monday.
— CNBC’s Alex Harring, Pia Singh and Jesse Pound contributed reporting. More

Sitting in a medical clinic recently, as a young-looking nurse extracted blood from his veins, your columnist’s mind turned to the flexibility of the American labour market. How long, exactly, had she been on the job? The somewhat shocking answer: it was her first month. Six weeks of training was all it took, she explained, to make the transition from eyelash technician to phlebotomist, which offered higher pay and better hours.Workers ditching old jobs for better ones has been a feature of the post-covid American economy. Early last year about 3% of Americans quit their jobs in any given month, the highest in two decades. Since July that has fallen to 2.3%, back to its pre-pandemic level. The decline is a sign that the labour market is gradually normalising. It has gone from being ultra-tight—beset by a seemingly endless worker shortage—to merely moderately tight.image: The EconomistDuring the period of ultra-tightness, analysts and investors paid close attention to a chart. The Beveridge curve, named after William Beveridge, a mid-20th-century British economist, depicts the link between unemployment and job vacancies. It is an inverse relationship: vacancies rise as unemployment falls. The logic is simple. When nearly all would-be workers have jobs, companies struggle to find new staff and have more vacancies.What makes the Beveridge curve fascinating but also frustrating is that it moves around. There is no fixed relationship between vacancies and unemployment. Take, for instance, an unemployment rate of 6%. This was consistent with about 2.5% of jobs in America being unfilled in the early 2000s, but 3.5% in the 2010s and 6% in 2021. As a rule, the higher the vacancy level for any given unemployment rate, the less efficient the labour market, since firms must fight to find workers. In graphical terms, an inefficient Beveridge curve shifts outwards, away from the origin point.The fascinating bit is the explanation for this. Normally, the location of the Beveridge curve is viewed as a measure of skills-matching. If workers lack the skills wanted by employers, the vacancy rate will be higher. During covid-19 and its aftermath, though, the problem was less a skills mismatch than a willingness mismatch. Many people were scared of illness and thus less willing to work. At the same time, having profited from a rapid recovery, many companies were willing to hire additional workers.An exceedingly inefficient labour market was the result. There were two job openings per unemployed person at the start of 2022, the most on record. Given such a Beveridge curve, the dismal conclusion was that unemployment would soar as the Federal Reserve wrestled down inflation. The causal chain went like this: to tame inflation, the Fed had to generate slower wage growth; for wages to slow, vacancies had to fall; finally, in an inefficient labour market, a big fall in vacancies implied a big rise in unemployment.Skip ahead to the present, though, and these fears have receded. Job vacancies have declined without much unemployment. There are now 1.5 job openings per unemployed worker. The labour market, in other words, looks more efficient. The Beveridge curve has shifted inwards, reverting to somewhere close to its pre-pandemic location. The typical explanation is that the willingness mismatch has abated: Americans have re-entered the labour force, while companies have cut their help-wanted advertisements.Question everythingThat, at least, is the conventional story. But think about it for a second and it is does not sit quite right. After all, the Beveridge curve is supposed to depict the state of the labour market. If, however, the curve itself is liable to move around, as this story suggests, it surely cannot be of much use. Do adjustments take place along the curve or does the curve itself change locations? After the fact it seems clear enough. In the moment, it is guesswork.There is a different, and better, way of constructing the Beveridge curve. The standard curve implies that it is the unemployed who fill job vacancies. The problem, as testified by your columnist’s phlebotomist, is that in reality, holes are often filled by job-switchers, not the unemployed. In research published by the Fed’s branch in St Louis, Paulina Restrepo-Echavarría and Praew Grittayaphong have reflected this, proposing a revised Beveridge curve that links prospective job-switchers to vacancies.Instead of the inverse traditional curve, their one has a positive slope: as vacancies rise, more workers consider jumping ship for new jobs. Indeed, they find that about four-fifths of vacancies since 2015 have been geared towards job-switchers, not the jobless. Along with its faithfulness to reality, their curve has another advantage in that it appears to be mostly stable. The pandemic was unusual because of the large rise in both job vacancies and job seekers, but that was an extrapolation of their revised curve, not a shift to a new location. One conclusion is that a relatively soft landing looks more plausible today. Although a decline in vacancies is still needed to calm wage growth, that largely translates into less job-switching rather than higher unemployment.There may be a more profound lesson to draw. In 2020 Katharine Abraham and colleagues at the University of Maryland also looked at whether they could improve the Beveridge curve, this time by incorporating job searchers who are already employed or out of the labour force. Their revised curve, like that of the St Louis Fed’s economists, is more stable than the traditional curve. The implication of that stability is that the economy actually does a decent job of matching workers with jobs.Many people, including politicians from both sides of the aisle, declare that America is plagued by a skills mismatch. Yet the evidence suggests that workers respond to wages, and that firms which are willing to invest can train them up. The skills shortage may be more of a talking-point than a fundamental constraint to growth. Remember: America is a country in which eyelash technicians can become phlebotomists in a matter of weeks. ■Read more from Free exchange, our column on economics:Why the state should not promote marriage (Sep 28th)Renewable energy has hidden costs (Sep 21st)Does China face a lost decade? (Sep 10th)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Hongbaos are usually reserved for special occasions, such as birthdays, weddings and the Chinese mid-autumn festival, which got under way on September 29th. But now these red envelopes, stuffed with cash, are part of a push by China’s banks to get citizens thinking about retirement. They are being offered to customers who register for private-pension accounts.Under a law introduced last November, workers may set aside savings in tax-deferred accounts accessible upon retirement, much like America’s Individual Retirement Accounts (iras). Those who want to enrol must open an account with a bank, before allocating their deposits to a licensed wealth manager. Savers can deduct contributions from taxable income; they pay no tax on capital gains and only a 3% tax rate at the time of distribution.If these terms sound attractive, it is because officials cannot afford for the scheme to fail. Chinese workers retire young—as early as 50 for women and 60 for men. Last year the population shrank for the first time since Mao Zedong’s “Great Leap Forward” in 1962, even as the number of old folk grew. China’s compulsory basic pension, which has more than a billion enrollees and is paid for through employer contributions, will be in deficit by 2028 and run out entirely by 2035, according to modelling by an official think-tank.When the reforms were introduced, analysts estimated that they would raise the value of China’s private pensions from $300bn (which had accumulated during the pilot version of the scheme), to at least $1.7trn by 2025. Such a pot would rival the world’s largest pension funds and give officials capital to channel to favoured industries. The scheme would also give Chinese people a new avenue for saving, drawing them away from the country’s troubled property market. Unfortunately, though, things are not going entirely to plan.Banks, which are mostly state-owned, have offered customers incentives to open accounts, including discounts on phone bills, rewards for referrals and even free ibuprofen (there was a shortage at the time). Although these have lured customers, with more than 40m having signed up by June, getting them to actually save is a struggle. In March fewer than one-third of accounts contained funds. The government has since stopped releasing figures, but there is little reason to believe that savings have risen in the intervening period. Moreover, the president of one bank estimates that 70% of funds deposited go uninvested, remaining in bank accounts, perhaps because depositors want to enjoy the tax advantages without entering financial markets they perceive to be risky.What is going wrong? Some of the problems facing the pension system reflect its design. Banks, with which customers are required to open accounts, are unfazed by the low contributions. They simply want to beat their rivals on sign-ups, and some are too busy defusing bad debts to focus on pensions, notes an analyst.But there are deeper issues at play, too. Officials say that workers are unaware of the importance of pension planning. Bankers propose bigger tax breaks and a higher maximum contribution, which is currently 12,000 yuan ($1,700) a year, or 15% of the average disposable income in Shanghai. Neither group wants to confront the possibility that the problem is even more profound. Chinese stockmarkets have long struggled to attract investors, with households preferring property. Financial assets are seen as too volatile—and too vulnerable to political interference.The situation is unlikely to improve any time soon. Pension pots cannot be invested offshore, meaning that they do not offer a way to escape a weak domestic economy. Local stockmarkets are not exactly becoming any more alluring: Shanghai’s main equity index is down this year. The government is also expected to raise the retirement age, which delays when savers can gain access to their investments. Last month the pensions ministry was forced to refuse requests from working-age depositors to withdraw their funds. All this means that another worry—a failing private pension system—can be added to the long list facing Chinese policymakers. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

In theory, financial indices are similar to thermometers, providing objective numbers that reflect external conditions. In reality, especially if the underlying securities are bonds, human choices about their composition make an enormous difference—as India is now demonstrating.On September 21st JPMorgan Chase, a bank, decided to include Indian government bonds in its emerging-markets index. The decision was hailed by Indian ministers, and Jamie Dimon, JPMorgan’s boss, as a sign of India’s rise. Then, on September 29th, ftse Russell, another indexer, announced, with much less ado, that it would not follow suit, owing to concerns about how markets function in India. Investors are awaiting a call by Bloomberg Barclays Emerging Market Bond Index.JPMorgan’s move may now prompt an influx of $24bn into India’s government-bond market as the switch is made, according to one estimate. Were Bloomberg’s managers to make a similar decision, and ftse Russell’s to be won over by reforms, the gain could rise to around $40bn. That is a sizeable figure, particularly when set against net purchases of Indian government bonds by foreigners, which amounted to just $3.8bn in the first eight months of this year. The changes in JPMorgan’s index, which will take place over a ten-month period beginning in June, could reduce India’s benchmark ten-year interest rate by as much 0.45 percentage points, or about 7%, reckon some economists.JPMorgan’s decision was prompted by support from large investors—when surveyed, 73% backed India’s inclusion in the firm’s emerging-markets index. Once the reallocation is complete, India’s share of the index will be 10%, matching those of China, Indonesia, Mexico and Malaysia. To accommodate India, there will be cuts in excess of one percentage point to Brazil, the Czech Republic, Poland, South Africa and Thailand. The result will be an increase in the relative importance of Asia.India’s inclusion is not an unalloyed good for the country, however. Outside money will strengthen the rupee, and thus depress inflation and the price of imports, benefiting consumers and some manufacturers. But it will also reduce the competitiveness of Indian exports, at a time when the government is keen to boost it, and swell the country’s large trade deficit. Foreign investors can also be skittish, leading to volatility and raising the chance of a sudden stop to capital inflows.Investors also face pitfalls. Bringing money into and out of India is, at best, messy. Foreign-ownership registration and reporting requirements are unhelpfully complex. There are taxes on transactions and gains, and then extra hurdles for those wishing to take their gains outside of India. These add costs, undermine returns and in the past have pushed away all but the most determined investors.Large local brokers and international banks are thrilled by JPMorgan’s decision, in part because it means lots of money will be arriving into the financial system, which they can help (for a fee) circumvent such impediments. Other firms are likely to try to create derivative products that capture the swings of Indian bonds without the accompanying burdens, which will annoy the Indian government.The happiest outcome would be for India to use the transition to do away with some of the regulation facing its securities markets, making the country more welcoming to foreign investment. The government now has an added incentive to be responsible in other areas, too. After all, smaller fiscal deficits would mean less vulnerability to capital flight. If such changes were made, the short-term relief of lower costs of capital would be joined by a more profound transition to greater financial stability. A lot can ride on the decisions made by anonymous index compilers. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More