Market Updates

Prices have climbed around the world, with commodities prices surging and U.S. inflation hitting a 13-year high. It’s the first time since the 1970s that a supply shock is the main culprit. This is where the comparison ends.

We still see a low risk of technical default by the U.S. and expect the debt ceiling debacle to ultimately resolve. The broadening economic restart keeps us tactically pro-risk, yet we see a narrowing path for risk assets to push higher and markets more prone to temporary pullbacks.

Investor focus has been on inflationary pressures and the impact on bond markets as many government bond yields continue to widen. Intertwined with these issues is how central banks react and adapt to this environment.

The recent jump in U.S. Treasury yields has spooked investors. Not all yield rises are the same. Yields driven up by rising policy rate expectations may harm equity valuations.

Markets have been jittery amid focus on China’s regulatory clampdown and the prospect of the Federal Reserve tapering its asset purchases. BlackRock believe the path for further gains in risk assets has narrowed after an extended run higher, warranting a selective approach, but they reaffirm their tactical pro-risk stance.

It was encouraging to see equity markets stabilise last week, but as we move towards the fourth quarter, it does feel like investor sentiment is somewhat brittle. We did see retail investors stepping in and ‘buying the dip’ last week. This remains an important market dynamic to watch.

The U.S. needs to soon raise a self-imposed federal debt limit, or the “debt ceiling”, to avoid a debt default. BlackRock don’t see fundamental risks from the debt ceiling showdown – with a low risk of technical default and limited chance of a temporary government shutdown.

Fears of peak growth and central bank hawkishness as well as recent tax hikes to pay for the impact of COVID-19 stimulus measures have all contributed to recent market bearishness.

Investors are grappling with an unusually wide range of potential economic outcomes beyond the post-pandemic restart, reflected in frequent shifts in equity market leadership and volatile bond yields.

Last week, markets appeared to be on the lookout for negatives. Whilst there wasn’t one overarching driver behind the weakness, a number of factors contributed.