Jenson Holmes from Titan Wealth offers this week’s round-up of global markets
MARKETS have had a tougher week, with rising bond yields taking centre stage in both the UK and US. Higher oil prices, resilient economic data and expectations that interest rates could stay higher for longer pushed government bond yields sharply higher, with UK ten-year gilt yields moving above 5% for the first time since 2008.
The move in bond markets has become increasingly important for investors, as global government bond markets have come under renewed pressure in recent weeks, with yields on 30-year bonds reaching their highest levels since 2007 in several major economies and ten-year yields also making multi-year highs.
This is naturally a legitimate concern for investors and is reflective of several factors including rising deficits and debt levels, the shrinking of central bank balance sheets, solid global growth and elevated inflationary pressures. Higher yields mean government bonds are now offering attractive income levels, creating stronger competition for equities.
Higher gilt yields also make the UK government’s job that bit tougher and give the Chancellor less fiscal room for manoeuvre ahead of the pending budget.
In the US, strong employment data highlighted the continued resilience of the economy and supported corporate earnings expectations, particularly within the technology sector.
Markets also eagerly awaited the US inflation report, which came in broadly in line with estimates although core inflation rose a little more than expected. Markets now expect the Fed to raise rates either this month or next with a further two increases over the next year or so.
UK equities were more sensitive to the rise in gilt yields, with domestically focused areas of the market under pressure, while the larger international companies within the FTSE 100 proved more resilient.
Oil was another major driver of markets this week as tensions in the Gulf escalated, with Brent crude rising above $108 per barrel before easing back. The Iran-backed Houthis seized control of Yemen’s entire Red Sea coast and captured three strategic islands on Friday, in a lightning offensive that cemented their hold on a vital shipping corridor linking Europe and Asia.
The developments are likely to deepen the Middle East war’s impact on international commerce, inflation and the global economy, as Saudi Arabia shut down a strategically important oil pipeline following the attacks, and after months of Iran’s blockade of the Strait of Hormuz. Higher energy prices have added to inflation concerns and contributed to the recent rise in bond yields.
Dario Amodei, the chief executive of Anthropic, has called for a slowdown in AI development following warnings from industry researchers that a super-intelligent AI would be a threat to humanity. OpenAI’s Sam Altman and Elon Musk have backed Amodei’s call for a more measured approach, while US President Donald Trump has stressed that the US keeps pressing forward as it competes with China for technological supremacy.
Overall, while higher bond yields and rising energy prices have created some volatility, equity markets have remained relatively resilient, thanks to the resilient global economy and buoyant corporate profits growth. However, bond market movements are likely to remain one of the key drivers of investor sentiment in the months ahead and rising sovereign yields is likely to the biggest threat to the positive macro and equity outlook.
