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No Cold Turkey

The financial markets have maintained their recent upward run, which has been fueled by a stream of seemingly positive developments that have boosted equities and high-yield bonds. However, we caution against the current wave of optimism, which could face a sharp reversal if the widely anticipated gentle economic deceleration fails to materialise.

Mounting Headwinds to Markets

In our latest presentation to a discerning group of private clients and investment professionals, we conducted a poll regarding the outlook for inflation in the United States over the next two years. The query posed was straightforward: Where will US inflation stand in two years? The results were telling, with only a mere 20% of the respondents envisioning a scenario where inflation hovers within the Federal Reserve's target range of 1% to 3%. In stark contrast, a resounding 80% of the participants foresaw inflation ranging from 3% to 5% or even surpassing the 5% mark.

It Doesn't Get Any Better, It Gets Tougher

The Middle East is at the centre of global geopolitics once again – and this time for some very unfortunate reasons. Whether the developments will have a bearing on the financial markets is something that only time will tell, but the profound human suffering that has affected so many lives will certainly affect our collective psyche. Our hopes and prayers are for an eventual de-escalation and the restoration of peace in the region.

Don't Get Anchored on the Wrong Past

In times such as these, investors need help in gauging the true value of the markets. For them, one of the toughest calls to take is estimating the fair value of the US 10-year government bond yield. In the past five years, the US 10-year government bond yield has ranged between as low as 0.51% and (very recently) as high as 4.8%. The task therefore is not easy.

A Quarterly Turning Point

The third quarter saw almost all asset classes end in the red. While global growth has remained robust, neither equities nor bonds could make any headway during the quarter as markets remained worried about central bank policies and the persistence of inflation. We do not expect the scenario to improve anytime soon.

A Wake Up Call from the Fed

The US and, to a large extent, the world economy are finally coming to terms with the somewhat perplexing reality of resilient growth and persistent inflation. While markets have long wished for interest rates to decline, the Fed has found little room to manoeuvre in the face of rebounding growth and an improving unemployment situation. Last week, the US central bank once again had to reiterate that it was not ruling out another increase this year and that interest rates would remain elevated for an extended period.