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Article | 12 May 2023 | Investments
Jaime Arguello
Chief Investment Officer
The US Federal Reserve (Fed) and the European Central Bank (ECB) both delivered 25 basis points interest rate hikes, although neither definitively indicated that this would be their final upward move. Meanwhile, First Republic, another mid-sized US bank, was taken over after being hit by massive deposit outflows. Core inflation remained sticky in many economies, while headline inflation crept higher in the eurozone and ticked lower in China. In the US, negotiations over the government debt ceiling appeared intractable, as the deadline for a resolution fast approaches.
Global equity markets held on to gains, buoyed by a better than expected start to the first quarter reporting season, despite being held in check by the Fed’s persistently hawkish tone. Global bond yields ground somewhat higher, with the yield on the US 10 year Treasury bond creeping back towards recent highs, as safe haven buying subsided. The US dollar traded in a fairly narrow range, as markets weighed the path of future interest rate policy, as well as the risk of further banking sector shocks. Gold briefly topped its all-time high, while the price of oil subsided on concerns for global demand.
Architas view
Having recovered well from their March lows, we sense markets could continue in a range-bound trend for the foreseeable future. In the US, a strong sense of economic resilience remains, although the impact of monetary tightening is beginning to show in the wider economy. There are modest signs of weakening in the labour market, but the unemployment rate remains historically low and the broad picture remains a healthy one. In this environment we expect markets to trend sideways, in the absence of any material change to the macro-economic outlook.
Within equity markets, we have become less positive on EM Asia ex-Japan. Although we have witnessed a pick-up in economic activity since the removal of China’s zero-Covid policy in late 2022, the region remains beset by geopolitical tensions with the US, as well as increasing state intervention in certain sectors. We believe the developed markets now show greater prospects for improvement.
With regard to fixed income, we maintain our current positioning. We expect bond yields to remain reasonably range bound at this late stage of the rate rising cycle. While we believe that market expectations for near term US rate cuts are a little premature, it is hard to see bond yields rising materially from here, given slowing economic conditions and an apparent pause in the Fed’s tightening campaign. Within fixed income we prefer investment grade credit and emerging market debt, where attractive levels of credit spreads and yields remain on offer.
