Weekly Market Update: US treasury yields hit 7-year highs; European risk renewed

Read our full Market Update Week 40

Market Update

US indices ended the week lower, with S&P 500 holding up more compared to the technology rich Nasdaq, as giants such as Amazon slipped. Financials stocks performed well given rising yields. The US 10-year Treasury yield closed the week at 3.23%, a 7-year high. UK stocks were down -2.5% and UK 10 Year Gilt yields rose to 1.575%. Global stocks were down -1.5% in local terms and -1.9% in Sterling terms. European, EM and Japanese equities fell -3.1%, -4.9% and -1.9% respectively in Sterling terms. It appears that emerging market declines haven’t finished just yet. European bond yields continue to climb with tensions surrounding Italy’s deficit plan weighing heavily on sentiment. Sterling had a positive week, gaining +0.7% vs USD. Oil rose +1.5% in local terms due to expected US sanctions on Iran. Gold returned +0.5% in GBP whereas metals generally fell -0.3% in GBP.

CIO Analysis

Italy continues to make the headlines, as the country’s leaders are on a largely predictable collision course with Brussels. The yield for the 10 year bond has risen from 1.8% at the beginning of the year to 3.59%. In our publications we have always highlighted the risks coming from Europe, even those risks not in favour with the press. The fact remains that the architecture of the Eurozone has significant structural flaws which may only be forgotten when the unanimous political will of the Eurozone members substitutes for the lack of a political framework to run it. There are two backstops to a European crisis. The European Stability Mechanism, which has only €500bn firepower to cover all of the Eurozone. This may be enough for two or three Greece-sized countries. But Italy’s total debt is over €2trn. The other backstop is the ECB, which can just print money to stave off investors. At this point, the political will does not exist to accommodate Italy’s government, while the central bank is continuing with its plans to wind down QE in December. The example of Greece is alarming. The country’s leadership was forced to all but forfeit national sovereignty or face bankruptcy. The same strategy can’t be followed again, since an Italian blowup could permanently damage the Eurozone.

David Baker, CIO