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Since our last Financial Market Stress Monitor on 13 th May, strains have continued to ease. This abbreviated Stress Monitor takes stock of developments since then. Overall, stress across core financial markets appears about as low as at any point …
10th August 2023
Despite oil prices hitting new year-to-date highs, other factors seem to be dominating the effect of rising oil prices on equity, bond, and FX markets. Even if, as we expect, oil prices edge lower over the next couple of years, we think the link between …
9th August 2023
The share prices of US banks have recovered some ground since a low point in May, as concerns about further failures in the industry have abated; Treasury yields have rebounded; and the economy has remained resilient. Even so, we’re sceptical banks will …
8th August 2023
We think the 10-year/2-year Treasury yield spread will become less inverted over the next year or so, but doubt this will come primarily via a continued rise in the 10-year yield like we saw last week. A striking part of last week’s Treasury sell-off was …
7th August 2023
The appreciation in the Swiss franc this year has been largely at odds with moves in many of the factors which typically drive the currency. We believe this is mostly due to intervention from the Swiss National Bank (SNB) in foreign currency markets. …
With the mini-meltdown in US bond markets taking centre stage over recent days, the dollar had been on the front foot for much of the week until the softish non-farm payrolls report earlier today prompted a rebound in bond markets and a drop back in the …
4th August 2023
The US Employment Report for July adds support to our view that long-dated Treasury yields will fall over the rest of this year . The weaker-than-expected July US Employment Report seems to have stemmed the bleeding in the bond market so far today, with …
The US government losing another one of its “AAA” ratings after Fitch Ratings’ downgrade decision Wednesday is more symbol than substance. But three key related points are worth highlighting. First, the market reaction differs significantly from that of …
Though investors appear to be increasingly moving towards our view of Bank Rate peaking at 5.50%, we think the levels priced into the market beyond this year – and, accordingly, expectations for gilt yields and sterling – are still too high. Today’s …
3rd August 2023
As major central banks near the end of their tightening cycles, the latest evidence of US economic resilience suggests to us that the dollar is poised to appreciate over the next couple of quarters. Over the past week or so, the Fed and other major DM …
The US government losing another one of its “AAA” ratings after Fitch Ratings’ downgrade decision last night is unlikely to matter much in the near term, but three points are worth highlighting. First, the market reaction so far is a far cry from that in …
2nd August 2023
Some measures of market risk premia have become quite low, suggesting to us that the bar for further big gains in risky assets has risen. If last week’s strong Q2 GDP print emphasised the surprising resilience of the US economy, the past couple of days …
1st August 2023
While we suspect that sticky core inflation in the euro-zone will mean “higher for longer” interest rates there, we think that the ECB will eventually deliver more rate cuts than currently priced into the markets. Along with our dovish view of Fed policy, …
31st July 2023
FX Markets Chart Pack (Jul. 2023) …
The Fed’s emphasis on data dependency amid even more evidence of resilience in the US economy pushed US Treasury yields up and the greenback higher against most major G10 currencies this week. Taken together with mixed activity data out of Europe and …
28th July 2023
The Bank of Japan (BoJ) seems to have effectively ended yield curve control (YCC) without making a big splash in financial markets, but we wouldn’t rule out further effects – on Japan’s markets and those around the world – just yet. For a start, we …
The BoJ’s decision earlier today to, in effect, end its long-standing Yield Curve Control (YCC) policy means that long-term government bond yields in Japan will become more responsive to economic conditions and developments in global markets. While that …
While both the Fed and ECB appear to be nearing the end of their tightening cycles, the strength of the US economy relative to the euro-zone suggests to us the euro is likely to fall further against the greenback over the coming months . Today’s …
27th July 2023
If the Fed’s tightening cycle ends today, as we expect, then the yield curve will be unusually inverted for this point in the monetary policy cycle. We think it will remain so until next year. Although money markets discount some chance of further …
26th July 2023
The Mexican peso’s relentless rise against the US dollar and most other major currencies is increasingly at odds with macroeconomic fundamentals. We think the peso is vulnerable to an abrupt fall over the coming months if, as we expect, risk sentiment …
25th July 2023
Chinese equities enjoyed one of their best days in years today, and we think they may continue to outperform equities elsewhere over the rest of this year. But the longer-term prospects for China’s stock market still look relatively unappealing to us. …
Euro-zone government bond yields have fallen further following the release of disappointing PMIs today. Given our pessimistic view of the economy, we suspect that they will generally end the year a bit lower still. As euro-zone PMIs for July came in …
24th July 2023
The US dollar has rebounded over the past two days and looks set to unwind much of last week’s fall. (See Chart 1.) With US data somewhat mixed, much of this rebound in the greenback seems to have been driven by a reassessment of the outlook for other …
21st July 2023
We expect the fortunes of the Japanese yen and Mexican peso – which have both been outliers in different ways lately – to soon reverse, as souring risk appetite unwinds some “carry trade” and their relative valuations provide scope for adjustment. Amid …
While recent data suggest the US in on a path towards disinflation and a less aggressive monetary policy stance from the Fed, we continue to think that the dollar will rebound in the second half of 2023. Short-term momentum has swung against the dollar as …
While the US dollar has fallen against most currencies since the start of the year, our estimates of the greenback’s “fair value” are broadly unchanged, leaving it only somewhat overvalued in our assessment. The valuations of most G10 currencies …
As the second quarter US reporting season gets into full swing, it’s easy to lose sight of the big picture: the peak-to-trough drawdown in earnings per share (EPS) from last year has not only been smaller than typically seen in an economic downturn, but …
20th July 2023
More evidence that inflation is falling back in most economies has pushed government bond yields down across developed markets (DMs) over the past couple of weeks. We think that disappointing growth, as well as central banks eventually cutting rates by …
19th July 2023
Despite today’s big reaction in markets in the UK to better-than-expected inflation news , we still think investors are overestimating the peak in interest rates there and underestimating how much monetary policy will be eased in 2024 and beyond. Indeed, …
All is well in the US economy – at least according to financial markets. But we think investors are underestimating the chance of an economic slowdown. The mixed news in the US retail sales and industrial production data, released today, didn’t seem to do …
18th July 2023
With yet more disappointing news about China’s economic rebound, it is worth taking stock of the headwinds facing the country’s equity market. For a start, the market reaction to the release of China’s Q2 GDP data has been fairly limited, both in Chinese …
17th July 2023
In the wake of last week’s solid US payrolls report and this week’s below-expectation CPI data, which have strengthened hopes of a “soft-landing” in the US economy, short-term momentum has swung heavily against the dollar. Although it has rebounded a bit …
14th July 2023
Equity, bond, and FX investors seem to have shrugged off the recent rise in oil prices. We wouldn’t be surprised if that continued even if prices rose further. Although they’ve taken a breather today, oil prices have been on a tear lately. WTI, which had …
Emerging markets (EM) currencies with high short-term yields – i.e., high “carry” – remain the strongest currencies against the US dollar this year, even if their gains over the past week have been relatively small. We think the conditions supporting …
June’s soft US CPI print seems to have given investors renewed hope that inflation could fall back to normal levels without the economy slowing too much, if at all. We continue to think that the chance of a more-significant economic slowdown is …
13th July 2023
Renewed murmurs of additional tweaks to the Bank of Japan’s (BoJ) Yield Curve Control (YCC) policy are giving further impetus to the yen’s recent rally. Though we forecast the yen to strengthen against the dollar this year, that forecast is driven mainly …
Not so long ago, a higher 10-year TIPS yield almost invariably meant an underperformance of US “growth” stocks vis-à-vis their “value” peers, a lower gold price, and a stronger dollar. That’s changed in 2023, though, with the relationships weakening …
Bigger falls in US core inflation than in the euro-zone or UK might mean government bond yields decline a bit more quickly in the US over the rest of this year, but ultimately we expect yields to fall in all three economies over time. June’s US CPI data …
12th July 2023
Enthusiasm around artificial intelligence (AI) seems to have waned a bit recently, and it may continue to do so if, as we expect, growth struggles later this year. But we think that it will resume sometime in 2024 and push the S&P 500 much higher. Over …
11th July 2023
There were two intriguing developments in bond markets last week, as the 10-year Treasury yield surged above 4% to its highest level since March. The first was a similar-sized increase in the 10-year Bund yield, to more than 2.6%. Th e second was an ~20bp …
10th July 2023
Signs the US labour market is beginning to loosen support our view that bond yields and equities could fall further, while the greenback could rally. Labour market data out of the US over the past two days has sent mixed messages : yesterday, the ADP …
7th July 2023
While the US dollar has dropped back in the wake of today’s non-farm payrolls report, continuing its recent struggles, two other trends in currency markets are showing some signs of exhaustion. Most notably, the Chinese authorities have stepped up their …
China has stepped up its support of the renminbi and Japan appears to be edging closer to direct intervention to prop up the yen. While pressure from higher US interest rates may well continue in the short term, we think that both currencies will rebound …
We still think a recession is on the way in the UK, and that it will bring gilt yields back down. Developed market sovereign bond yields have been on the rise again so far today , as investors have continued to price back in the “higher for longer” …
6th July 2023
We expect the Brazilian real to reverse its gains against the US dollar by the end of the year as Brazil’s central bank eases policy and risk sentiment deteriorates. Although it has fallen a bit over the past few weeks, the Brazilian real has risen nearly …
The valuations of equities are, in general, still a long way from being unprecedently high compared to those of government bonds. There are umpteen ways to compare the valuations of equities and government bonds. One recent development in the UK to catch …
5th July 2023
China has stepped up its support of the renminbi, which has rebounded over the past couple of days. This may well prove a turning point for the currency. Three key points are worth emphasising. First, China’s approach to managing its exchange rate has …
4th July 2023
US stock markets ’ gains in recent months , both in absolute terms and relative to their European peers, owe a lot to their rising valuations. But equities in the US are now arguably quite highly valued, which in our view will contribute to them …
3rd July 2023
The US dollar has continued to tread water against most major currencies this week. With G10 central bankers generally sticking to their hawkish messages at the ECB’s Sintra conference and few major data releases, FX markets seem set to end the week (and …
30th June 2023
Reconciling the slide in Japan’s currency with big flows into its stock market from abroad and a perception that the appeal of foreign bonds to Japanese investors has waned in response to high hedging costs is easier to do once securities transactions …
