Weekly Market Update: Bond yields rise, Pound rallies on potential Brexit "pathway"

Read our full Market Update Week 40

Global stocks gained throughout the week in local terms, however they fell in Sterling terms after the Pound rallied on news of a potential “pathway” to a Brexit deal. Global stocks fell -1.5% in Sterling terms, with the decline led by weak performance from US and Japanese equities; US stocks fell -2.0%, while Japanese stocks fell -2.7%. UK and European stocks gained +1.4% and +0.4% respectively. Globally, the worst performing sector was Utilities; unsurprisingly given its bond-proxy nature as yields rose. Materials and Financials posted strong gains in local currency terms, driven partly by a steeper yield curve. Bond yields closed the week higher after signs of progress on a US-China trade deal; President Trump has agreed to suspend the planned tariff hikes for now, and China has agreed to buy more US farm products. The US 10 year yield traded 20.0bps higher, closing the week at 1.729%. In a similar manner, UK 10 year yields climbed 26.2bps and closed the week over 0.7%. Gold fell -1.0% in US Dollar terms whilst oil gained +3.6%.

Chief Economist Analysis

Last week’s rout became this week’s rebound, ostensibly due to renewed hopes of a trade deal between the US and China. The larger picture is one of a sideways trading market, where central bank dovishness provides a floor, supporting “buying any dip” strategies, whilst a deteriorating earnings and macro backdrop – only partly due to the trade wars – puts a ceiling on equity indices. Share prices are expected to move in this narrow corridor, unless some catalyst takes them out of their rut. Meanwhile, in bond land, prices remain extremely high. Last week Greece joined the club of countries who borrow at a negative yield, in essence getting paid to borrow money. While this reflects partly the market’s belief that the country will no longer be excluded from the ECB’s QE, it is also indicative of the relentless chase for capital gains in the fixed income market. Yet, despite the obvious exuberance, this may not be a traditional bubble, since it is supported by central banks, not average investors. Finally, some daylight broke in the Brexit fog, as Leo Vardakar and Boris Johnson appear to be closer to a deal. It is becoming, however, obvious that concessions in N. Ireland may be the price for Brexit. 

George Lagarias, Chief Economist

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