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Although the US stock market has started to come under pressure from rising Treasury yields, the valuation of equities relative to government bonds is still a long way from being as stretched as it was before the dot com bubble burst and on the eve of the …
18th August 2023
The continued rise in Treasury yields, following what may well have been the Fed’s final interest rate hike last month, contrasts with the experience of recent tightening cycles. But we still expect falling inflation between now and the end of the year to …
17th August 2023
With the headwinds growing for China’s economy, we think its equity markets will struggle, its 10-year yield will continue to fall and its currency won’t rebound as quickly as we’d thought. At the start of the year China’s economy was powering ahead. But …
Although disinflation in the UK is lagging that in the US, we expect yields in both places to fall this year. And we think that Gilt yields are set to fall by a bit more than Treasury yields through 2024 and 2025. UK CPI data for July, released this …
16th August 2023
The difficulties facing China’s economy and financial system continue to dominate much of the headlines. So far, the gloom has not made a major dent in the optimism reflected in global markets, although that could yet change. Another round of …
15th August 2023
We don’t think the ongoing troubles in China’s property sector mark the beginnings of a financial crisis, but do expect them to be a drag on returns from the country’s stock market over time. News that Country Garden – a large Chinese property developer – …
14th August 2023
With more poor economic data out of China and US yields again threatening to push towards new highs, it is little wonder that the yen and the renminbi have come under renewed pressure. While we still think both currencies will rebound later this year, our …
11th August 2023
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
We think disinflationary pressures will help the Fed pivot to rate cuts sooner than investors expect, giving a boost to “safe” assets this year and next. US CPI data for July, published today, was largely in line with consensus expectations. (See here .) …
The yield of 10-year Japanese government bonds (JGBs) may come closer to the new “just-in-case” cap of 1.0% in the coming months, but we doubt it will settle that high further ahead. Since the Bank of Japan (BoJ) effectively abandoned Yield Curve Control …
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 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 …
4th August 2023
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 …
We suspect the boost to “risky” assets from the resilience of the economy may have mostly run its course. Risky assets in the US have stumbled over the past couple of days as Treasury yields have climbed. But that still leaves them having made quite big …
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
The key points that stand out from the recent moves by central banks in Brazil, Chile and Hungary to cut interest rates are, first, how quickly policymakers have shifted from hawkish to dovish and, second, how they appear to be front-loading their …
We think El Ni ño poses downside risks to the prices of emerging market assets, in general. But even if the effect in aggregate wasn’t all that large, there are several vulnerable sectors where such an event could create some relative winners and …
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
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 …
28th July 2023
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 …
Our View : Growth in most advanced economies will disappoint later this year, putting pressure on “risky” assets and favouring “safe” ones. Developed markets (DM) government bond yields will therefore decrease further, helped by central banks shifting …
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
The continued rise in the valuations of “risky” assets relative to “safe” ones mostly seems to reflect growing confidence in the economic outlook. We think that optimism will be disappointed and that risk premia may rise again – and valuations may fall – …
26th 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 …
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. …
25th July 2023
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
Japan bulls have proposed a range of explanations to justify the outperformance of the TOPIX relative to other equity indices over recent months. While there are some signs that firms are enjoying stronger pricing power, we aren’t convinced that a …
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 …
21st July 2023
The Treasury yield curve has been inverted for a long time by past standards, but we think it could remain so until next year even if there’s a recession in the interim. At the start of this month, it briefly looked as though the beginning of the end of …
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
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 …
14th July 2023
The stock market in the US has rarely rallied in recessions that have taken place there since the mid-1850s. Our forecast is that it will take a knock amid a recession in H2 2023 before powering ahead. We would point to five key examples of the stock …
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
We still think the yields of long-dated sovereign bonds in Canada, Australia and New Zealand will fall by the end of this year, but no longer expect them to do so by much more than the yields of bonds elsewhere. Canada, Australia and New Zealand have led …
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
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
