Daily Commentary BY THE CURVE TEAM –

Rising Uncertainty Spreads To Bond Markets

28th of March, 2018

Another night of equity market weakness was overshadowed by developments in interest rate markets in a sign that growing uncertainty is unsettling the market. Geopolitical uncertainty and monetary policy divergence remain front and centre and remain a threat to financial stability globally.

Equity markets have been on a bit of a rollercoaster ride over the past week and a bit, plunging last week to recover early this week and to only continue to selloff today. It looks like the trade dispute continues to weigh in, with tech stocks leading the decline with news that the US President Trump could push down hard on Chinese investment in technology companies.

Growing uncertainty over the state of the market looks to have hit a key level as the equity sell off has filtered into the bond market. US 10-year Treasuries broke through the key level of 2.8%, indicating a more structural shift in sentiment as investors adjust asset allocations.

It will be an interesting next couple of weeks offshore as we await the outcome of the US/China trade dispute amidst a back drop of higher rates and potentially higher inflation.

Over to Europe and there looks to be a bit of discontent amongst ECB members over the timing of monetary policy normalisation. With inflation sitting just over 1%, some members are urging a more patient approach.

One of these was ECB member Erkki Liikanen, who cited that,

“A gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed 2 percent become more prominent in inflation expectations.”

This cautious comment comes as it is expected that the central bank will start winding down asset purchases and adjust rates upward mid 2019.

Very interesting times ahead indeed that will warrant careful monitoring.

Oliver Parsons

Client Relationship Manager