Weekly Update - Renewed bond market tensions

Bond yields have increased again since the beginning of September with most topping their 2008 Great Financial Crisis peaks. The reasons for this increase are fourfold: (i) the United States economy continues to power along with surprising strength, (ii) the rise in oil prices (even if they have eased in recent days) has raised fears of a fresh bout of inflation, (iii) central banks continue to strike a hawkish tone, and (iv) budget discussions are reviving fears for the sustainability of public debt in several countries. 10-year sovereign yields have risen to near 4.8% in the United States, 3% in Germany and 3.5% in France. The rise has been less marked in the UK where already high yields remain close to 4.6%. Pressure has been particularly fierce on Italian bonds, now trading at a near 200 bp spread to the German bund. 

We stand by our central scenario of resilient but weaker economy. Companies and households still have the cash to mitigate, at least in part, the latest tightening of monetary and financial conditions. Meanwhile, persistently strong labour markets and an easing of inflation will help sustain household purchasing power. But we see some risk of a tighter fiscal stance, particularly in the euro zone, which could weigh on economic growth. Moreover, the surge in bond yields also raises the risk of financial instability, as seen in the United Kingdom a year ago or with US regional banks in March.

Less favourable equity market momentum without questioning our appreciation of valuations. The rise in oil prices since the beginning of September had initially weighed on equity markets – with the exception of the energy sectors. The acceleration of the rate hike more recently has prolonged the downward movement. In fact, European equity markets are now below their 200-day moving averages (US markets are close) – a traditionally leading sign of persistent weakness. But the appreciation of valuations that remain unchanged. In absolute terms (estimated prices/revenues) as well as relative to 10-year rates (risk premium), US equity markets were expensive – but not on unprecedented levels - before recent market turbulence. European markets were more attractive in absolute terms but, relative to rates, their valuations also appeared historically high. The recent decline in the equity and bond markets is not enough to radically change these valuation levels or their relative attractiveness levels.

We remain confident in our strategic balance between equities and fixed income. The latest bond market tensions have been accompanied by a fall in equity markets and a depreciation of the euro against the dollar. As it stands, we stick to our highly diversified positioning in order to be protected against these turbulences. That said, we remain highly vigilant, and ready to react to any changes in the situation

Regarding the main economic data and events of the week, we decided to talk about the decline in oil prices and the US September job report.

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