Market Updates

Bond yields are experiencing a rapid increase as the market adapts to the consequences of the new macroeconomic environment. BlackRock strategically favours short-term bonds within the United States for income generation, long-term bonds in Europe and the United Kingdom, and investments in Japanese stocks.

Last week was tough for global equities, with most major indices trading lower following a “hawkish pause” from the Federal Reserve (Fed), sending Treasury yields and the US dollar higher.

The equity selloff witnessed in 2022 has seen a significant reversal in the current year. However, the recovery in the fixed income market, particularly with regards to long-term bonds, has been notably sluggish.
BlackRock anticipates that this slow recovery in long-term bonds will likely prompt investors to seek increased term premiums, seeking compensation for the heightened risk associated with holding these bonds.

Focus is on central bank announcements this week, which incudes the Federal Reserve meeting on Wednesday, the Bank of England and Swiss National Bank on Thursday, followed by the Bank of Japan on Friday.

Inflation is expected to continue decreasing as the discrepancies resulting from the pandemic are resolved. According to BlackRock’s assessment, approximately two-thirds of the shift in spending patterns has already reversed. However, there is a concern that in the upcoming year, economic growth may be dampened as savings are depleted.

In terms of market drivers, investor focus is mainly on the upcoming European Central Bank meeting (14 September) and the Federal Reserve meeting (20 September). Some stronger recent US macroeconomic data suggest the possibility of a more hawkish tilt here.

Short-term government bond yields have climbed in tandem with long-term yields, driven by swift increases in central bank interest rates. BlackRock have adjusted their underweight position in developed market nominal government bonds, favoring short-term bonds while shifting investment grade credit
from a neutral stance to underweight.

Equity markets ended August on a positive note, with Chinese stimulus aiding sentiment, along with global macro data releases that increased hopes central banks would pause their rate-hiking cycles.

It looks to be a slow start to the week in Europe, thanks to a Monday UK bank holiday, but there are several global macro data points later in the week that could garner investor interest, including Friday’s August employment report.

This week, the Fed’s annual central banker conference at Jackson Hole, Wyoming (Thursday/Friday) should capture investor attention, along with earnings from tech giant Nvidia (Wednesday after the market close). With little Chinese macro data scheduled this week, the market should get some respite there.