3 to 9 July: Growing Pains

The upturn in global bond yields continued into its second week as central bank meeting minutes and mostly positive data caused investors to reassess the longer-term outlook for interest rates. However, equities were more resilient than a week ago, ending mostly unchanged. Looking in more detail at bond market moves, it’s interesting to note curves steepened, with little action in shorter dated securities. This is to say, the market is not necessarily pricing higher interest rates, but the start of a withdrawal from quantitative easing. In the context of continued economic momentum across most of the globe (UK an obvious exception), this should surely be expected. As former FED Chairman Bill Martin said, the job of a central bank is “to take away the punch bowl just as the party gets going”. Nonetheless, whilst there is certainly room for rates to continue to trend higher (we are still talking about small moves and near all-time low yields), we think it is unlikely we are going to see a “taper tantrum” yet. In 2013, US 10 year yields rose 150bps, as opposed to the last fortnight’s 25bps move, and this all comes in the context of limited inflationary pressures.

Oil experienced a roller coaster, hitting a 1 month high on Monday, before declining around 4% on the week amidst negative headlines; OPEC shipments and US shale production rising. This alludes to our theme of oil producing nations playing weak hands, which restrict their ability to manage the price higher.

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