Beaufort Analysis No. 309 – En Marche! (Towards Year-End Turbulence)
Wall Street finished last week with a bout of increased volatility with the S&P 500 down -2.3% on Friday in US Dollar terms; this resulted in the worst week for US equity markets since March. Conversely, US Treasuries experienced their greatest weekly rally in three years with the 10 Year US Treasury Yield finishing the week at 2.85%. Both of the aforementioned market movements point to investor anxiety about the increasing possibility of an imminent US recession. More and more sections of the US ‘yield curve’ (the difference between the interest rate on long-term and short-term US Treasury Bonds) are now inverted. 2 and 3 Year yields are now above 5 Year yields, while the gap between 2 Year and 10 Year Yields is at its lowest in more than a decade.
In Europe the turbulence is evident not only in financial markets (with the Eurostoxx 600 down -3.4% for the week), but on the boulevards of Paris. The election of President Macron in 2017 was heralded as marking France as an island of stability and common sense as Brexit, Trump and Italian populism reigned in other countries. With an approval rating of 23%, Macron’s position is now looking increasingly precarious as the ‘Gilets Jaunes’ take to the streets, often with violent consequences. Their list of 25 demands are both left and right-wing in nature, illustrating how the République is far from immune from populist protesters driven by high unemployment and stagnant living standards.
In Britain, along with Christmas jingles, the airwaves are consumed with Brexit and the upcoming vote in parliament on Theresa May’s deal this Tuesday. While it is very difficult to predict the outcome, and financial markets do a poor job of efficiently pricing binary political outcomes, it is worth noting that Sterling derivatives markets are pricing a great deal of volatility on a 3-month horizon – with implied 3-month volatility rising to 14% last Thursday.
Further afield, we have seen a sustained fall in global government bond yields – with Canadian 10 Year yields falling over 50bps since 5th October as fears grow about the housing market and wider economy. The Chinese economy faces a number of headwinds, namely the ongoing trade negotiations with the US. In addition, the economy must now contend with the spectre of deflation as data released over the weekend showed slowing consumer confidence and producer price indices. While Chinese policymakers have a variety of levers to pull to stimulate their economy, the main concerns faced by investors are a co-ordinated global slowdown in tandem with increased political risks in key countries.