Turbulence Zone

23 October 2023

Dear clients,

It has been a cautious start to the week in Asia, with markets waiting to see when and if Israel will launch a ground invasion of the Gaza Strip, and bonds continuing their rapid sell-off.

Leaders from the US, Canada, France, Germany, Italy and the UK on Sunday stressed their support for Israel and its right to self-defence, but urged it to adhere to international humanitarian law and protect civilians.

Nevertheless, some trucks carrying humanitarian aid did get through, which was enough progress to bring down oil prices.

However, this failed to impress bond markets, with the 10-year US bond yield rising again to 4.967%, having jumped almost 30 basis points in the past week alone.

The market has been unable to attract any safe haven offerings as investors demand higher real yields and term premiums, prompting speculation that the market is pricing in a new normal for rates above the Federal Reserve's 2.5% target.

The scale of US borrowing may also be a concern given that Washington last week reported a $1.695 trillion budget deficit for fiscal 2023, up 23% from the previous year and higher than all pre-pandemic levels.

Japanese yields also rose after the Nikkei newspaper reported that the Bank of Japan is discussing further adjustments to its yield curve adjustment policy, which could be announced at its October 31 meeting.

The global rise in borrowing costs has led the market to all but rule out the risk of a Fed rate hike next week, with the probability that it will stop tightening policy altogether at around 70%.

Similarly, markets see little risk of a rate hike by the European Central Bank at this week's meeting and are flirting with the likelihood of a rate cut from April next year.

Rising bond yields are also putting equity valuations to the test and bode pain for any company that fails to meet market expectations for earnings this week.

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