Bond yields continue their march up

10 year US Government bond yield tops 5%
Strong jobs’ market data in the US, economy still largely resilient
Israel-Gaza war has had little direct effect, so far

During October, the financial markets have born witness to the ongoing bond market rout and the ensuing repercussions of the most-followed bond yields. Ironically, the investors are getting more accustomed to the idea of “higher for longer” message reiterated by the main central banks, seemingly adjusting the asset prices in order to reflect the interest rates staying high not just in the short term, but potentially for longer period, too. As a result, the yields on the US 10 Year Treasury bonds have touched 5% for the first time in many years (4.57% a month ago), while German sovereign 10 Year Bond yields have actually declined to 2.78% (2.84% a month ago). With that in mind, the developed markets’ stock index MSCI World has retreated 3% and emerging markets’ stock index MSCI Emerging Markets has dropped 4%.

Middle East in chaos again

Previous month will be remembered for yet another round of violence in the seemingly never-ending Israeli-Palestinian conflict. In the wake of multiple terrorist attacks on the Israeli settlements and cities, the Israeli state has retaliated with a major offensive on the Palestinian-controlled Gaza strip. As the terrorist attack and the response stood out in terms of casualties and damage done, regional and global powers have warned against the conflict potentially spreading to neighboring countries. The prospect of that has apparently pushed the oil prices up as the tensions escalated throughout the month, although it must be admitted the conflict, so far, has had little effect on the global financial markets, hence the highly-diversified portfolios of the Discretionary Portfolio Management service have remained largely immune to the Middle East tensions.

Bond yields continue their march up

Contrary to the many predictions a year ago, the global economy is not easily succumbing to the historically steep hike in the global interest rates. Thankfully, leading economic regions are showing stubbornly low unemployment and GDP growth figures mostly staying above zero, although the variation in between the major economic blocks are vast. The leading economy in terms of upside economic surprises is the USA, which has shown unexpected resilience in the face of the challenges thrown at it. While otherwise that may be very much welcome news, the markets are fixated on the central banks’ ongoing battle on inflation. Looking through these lenses, a resilient economic activity and labor market tightness may signal ongoing support to still-elevated inflation levels, which may require central banks to retain the current high interest rates for longer or even consider increasing them. Therefore, the mostly optimistic surprises on the economic front has caused some investors to suspect that these development could after all really result in “higher for longer” interest rates. While the bond yields have been reaching for the above-mentioned highs, the investors were in a steep structural shift mode, as if re-adjusting their previous expectations that interest rates would stay high for a quarter or two, only.

Chart 1 – USD 10 yr Treasury yield

Source: Investing com

Companies starting out their reporting season

In October, many companies were reporting their earnings for the 2023 Q3, which in turn have affected the dynamic of the financial markets. The expectations for the current season were not set too high and the base-effect for the economic activity should have looked less challenging, as the companies started reporting lower guidance coupled with slower sales and profits in droves in the second half of 2022, hence the comparisons could show some pick up in the business activity. Having said that, some optimistic twist in the company reports has already been expected by the market, as the price multiples have largely stayed higher in recent months. In other words, the earnings’ season is likely to stay optimistic, but that may be already priced in the current valuations. The expectation has at least partially materialized, even though the earnings’ reporting season was not over as this publication was being prepared for publishing.

Market view

The Luminor investment team is witnessing the slight increase in competitiveness in fixed income versus equities. That is mainly thanks to the increased yields on bonds. Although equities far outweigh the increased yields by expected returns, the still-uncertain prospects of global economic activity supports slightly more conservative market positioning with a minor preference to fixed income.

DISCLAIMER

Warnings

This Marketing Communication is not considered investment research and has not been prepared in accordance with standards applicable to independent investment research.
This Marketing Communication does not limit or prohibit the bank or any of its employees from dealing prior to its dissemination.

Origin of the Marketing Communication

This Marketing Communication originates from the Portfolio Management unit (hereinafter referred to as PMU) – a division of Luminor Bank AS (reg. No 11315936, with registered address at Liivalaia 45, 10145, Tallinn, Republic of Estonia, represented within the Republic of Latvia by Luminor Bank AS Latvian branch, reg. No 40203154352, address: Skanstes iela 12, LV-1013, Riga, hereinafter - Luminor). PMU is involved in the provision of discretionary portfolio management services to Luminor clients.

Supervisory authority

As a credit institution Luminor is subject to supervision by the Latvian Financial Supervisory Authority (Finanšu un kapitāla tirgus komisija). Additionally, Luminor is subject to supervision by the European Central Bank (ECB), which undertakes such supervision within the Single Supervisory Mechanism (SSM), which consists of the ECB and the national responsible authorities (Council Regulation (EU) No 1024/2013 - SSM Regulation). Unless set out herein explicitly otherwise, references to legal norms refer to norms enacted by the Republic of Latvia.

Content and source of the publication

This Marketing Communication has been prepared by PMU for information purposes. Luminor will not consider recipients of this Communication as its clients and accepts no liability for use by them of the contents, which may not be suitable for their personal use.

Opinions of PMU may deviate from recommendations or opinions presented by the Luminor Markets unit. The reason may typically be the result of differing investment horizons, using specific methodologies, taking into consideration personal circumstances, applying a specific risk assessment, portfolio considerations or other factors. Opinions, price targets and calculations are based on one or more methods of valuation, for instance cash ﬂow analysis, use of multiples, behavioural technical analyses of underlying market movements in combination with considerations of the market situation, interest rate forecasts, currency forecasts and investment horizon.

Luminor uses public sources that it believes to be reliable. However, Luminor has not performed independent verification. Luminor makes no guarantee, representation or warranty as to their accuracy or completeness. All investments entail a risk and may result in both profits and losses.

This Marketing Communication constitutes neither a solicitation of an offer nor a prospectus in the sense of applicable laws. An investment decision in respect of a financial instrument, a financial product or an investment (all hereinafter “product”) must be made on the basis of an approved, published prospectus or the complete documentation for such a product in question, and not on the basis of this document. Neither this document nor any of its components shall form the basis for any kind of contract or commitment whatsoever. This document is not a substitute for the necessary advice on the purchase or sale of a financial instrument, a financial product.

No Advice

This Marketing Communication has been prepared by Luminor PMU as general information and shall not be construed as the sole basis for an investment decision. It is not intended as a personal recommendation of particular ﬁnancial instruments or strategies. Luminor accepts no liability for the use of the Marketing Communication content by its recipients.

If this Marketing Communication contains recommendations, those recommendations shall not be considered as an objective or independent explanation of the matters discussed herein. This document does not constitute personal investment advice or take into account the individual financial circumstances or objectives of the persons who receive it. The securities or other financial instruments discussed herein may not be suitable for all investors. The investor bears all risk of loss in connection with an investment. Luminor recommends that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors if they believe it necessary.

The information contained in this document also does not constitute advice on the tax consequences of making any particular investment decision. The estimates of costs and charges related to specific investment products are not provided therein. Each investor shall make his/her own appraisal of the tax and other ﬁnancial advantages and disadvantages of his/her investment.

Risk information

The risk of investing in certain ﬁnancial instruments including those mentioned in this document, is generally high, as their market value is exposed to many different factors. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. When investing in individual ﬁnancial instruments the investor may lose all or part of their investments.

Important disclosures of risks regarding investment products and investment services are available here.

Conflicts of interest

To avoid occurrence of potential conﬂicts of interest as well as to manage personal account dealing and / or insider trading, the employees of Luminor are subject to internal rules on sound ethical conduct, management of inside information, handling of unpublished research material and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. Luminor’s Remuneration Policy establishes no link between revenues from capital markets activity and remuneration of individual employees.

The availability of this Marketing Communication is not associated with the amount of executed transactions or volume thereof.

This material has been prepared following the Luminor Conﬂict of Interest Policy, which may be viewed here.

Distribution

This Marketing Communication may not be transmitted to, or distributed within, the United States of America or Canada or their respective territories or possessions, nor may it be distributed to any U.S. person or any person resident in Canada. The document may not be duplicated, reproduced and(or) distributed without Luminor’s prior written consent.