Market overview – Alan McIntosh, Chief Investment Strategist
Last week proved to be another volatile one for global markets as worries over inflation and possible policy responses from central banks exercised investors’ minds. Bond yields continued to move higher. Slightly better news came when it was announced that the vote on raising the US debt ceiling would be postponed until December, giving more breathing space for the Democrats as they try to get Republican support for the infrastructure and social care stimulus packages. What started as a tricky week for equities closed on a positive note. Lower than expected non-farm payroll numbers on Friday pointed to a US labour market that is still struggling to get people back into jobs. Whether this will influence the Federal Reserve on the timing of its QE tapering programme remains to be seen however.
The recent rise in global bond yields has largely followed the sharp increase in energy prices and an accompanying pick- up in inflation expectations. It has also had an impact on parts of the equity market, particularly higher valuation growth and technology stocks where future earnings are discounted back to the present using a bond yield proxy. The higher the discount rate the lower the present value, so the valuation models would say. It is a little esoteric for most investors but is also a reminder that there are a multitude of factors that can determine the attractiveness of individual equities, markets and asset classes on any particular day. All the more reason to maintain a longer-term focus.