Weekly Market Overview – Recovery continues despite rates normalisation talk by Fed

Mon 26 Feb 2018

The market sell-off at the start of February was largely attributed to fears of rising interest rates in the US, with concerns that planned increases in fiscal stimulus to an already strong economy meant the Fed was getting behind the curve. Last week various members of the FOMC, although notably not the Chair Jay Powell, came out with comments in support of a normalisation of US monetary policy, implying that there will be at least 3 interest rate rises this year, if not more. US 10Y Treasury yields did spike, reaching 2.96% on Friday, although they have since fallen back to 2.86%. However equity markets were largely unperturbed, with global equities gaining 0.6% in Sterling terms. Emerging Market equities led the way, up 1.9%, while Japanese equities gained 1.3% and US equities gained 1.0%. UK and European equities did fall -0.4%, however. Over the week Sterling gained 0.5% vs EUR, 0.3% vs JPY, but fell -0.4% vs USD. In US Dollar terms Gold fell -1.4% while Oil gained 2.9%.

A full equity market rebound was thwarted last week as the S&P 500 hit some critical technical levels, while worries were accentuated by the rise in the US 10 Year Treasury yield, hovering around 3%. Where equity and bond markets will go from here in the short term is anybody’s guess. However, we believe investors should get ready for higher volatility going forward as, without the Fed’s explicit support for risk assets, traders are already more reluctant to buy any dips. However, the earnings and macro backdrop is still robust, and valuations are now cheaper, on accelerating profits, so long-term investors with a stomach for volatility should remain vigilant but not necessarily worried at this particular juncture.

David Baker – CIO