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Have there been shifts in bond market volatility?

Reflecting on the past month, Jeremy Richardson explores:

  1. Volatility in the bond markets
  2. Slower economic growth in China and continental Europe
  3. A focus back onto company fundamentals

Watch time: 4 minutes 04 seconds

View transcript

Hello, this is Jeremy Richardson from the Global Equity team here with another update. Three things to update you on this month, starting with volatility in the bond markets.

We've gone from a situation in the early part of the summer where policy was going to be data dependent in August that shifted to policy that was going to be higher for longer. And this month we had a new phrase from the deputy, the vice chairman of the Fed, which was that in his opinion at least, rates are sufficiently restricted. And that was taken as some signs of encouragement by the bond market that this sort of hawkish tone that we had over the summer is now something which is much more sort of neutrally balanced, but it wasn't strong enough to actually stop rates from breaching 5% of the US ten-year Treasury.

Interestingly, though, they haven't so far stayed there in a convincing way and that may have something to do with that volatility that we're now seeing also in the geopolitical situation. And there is a sense still that in times of trouble, that U.S. ten-year treasuries, or U.S. Treasuries generally, are a good place to hide.

But the second thing is that place to hide is still being now seen in the equity market, too. We’ve spoken a lot about how performance in the equity market has been quite narrow, led by a small number of large technology companies, and that still appears to be the case. We haven't yet seen a rotation out of those large technology companies into some of the more left behind smaller mid-cap names which are more broadly diversified. That could yet happen, but for it to occur, we probably need that sense of caution about the immediate outlook to be replaced by one of the growing degrees of comfort about the economic situation. And for the moment, it does still feel as though there is a lively debate about the outlook for the global economic situation, which still appears to be very much distorted by geography.

So, if we move from sort of east to west, China is delivering slower economic growth than people have been expecting and there are some signs of pockets of weakness, there. Now continental Europe is having a very difficult time. Economic growth appears to be slowing, whereas North America, in contrast, continues to be seeing very strong momentum, at least compared to expectations, although there is this debate about how long that will last. The final thing I wanted to mention is just the nature of the market, for you might have been forgiven for thinking that given all that I’ve been talking about - bond market volatility and think you're looking for safe harbours and places to hide in large cap tech stocks in the equity market, that the market itself is characterized perhaps by macroeconomic overtones and geopolitical concerns. That doesn't appear to be the case. It does feel as though the equity market has gone through something of a transition over the course of the late summer into the more recent few weeks.

And we're beginning to see the market once again focus back onto company fundamentals. In part that might may be because we're now just entering into the reporting season for the third quarter. Some interesting results coming out. And that always tends to be a moment when investors return to focusing back onto these messages from individual companies. But it does feel as though there's a sort of a shift in the currents within the market that is meaningful, at least for the for the moment, that fundamentals are beginning to regain their focus from investors.

And for stock pickers like ourselves, who are trying to pay attention to these long term fundamentals, that is a heartening and an encouraging step. I hope this has been of interest and I look forward to catching up with you again soon.

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