• April 9th, 2018
• By Midsilver Investment Limited

Global stock markets faced a significant downturn in late January and early February. Following a consistent uptrend spanning several months, culminating in the best January performance since the 1990s, a labor market report indicating higher than anticipated US wage growth initiated heightened market fluctuations. Equity values experienced a roller-coaster ride, marked by unusual intraday volatility. This adjustment occurred simultaneously with increased volatility in the government bond markets. Long-term Treasury yields had been on an upward trajectory since mid-December, driven by growing investor apprehension regarding inflation threats and the potential macroeconomic consequences of US tax reforms. A sudden surge in yields towards January's end set the stage for a stock market downturn in the US and subsequently other advanced economies (AEs). Government bond yields in multiple AEs also climbed, as synchronized global growth momentum prompted investors to anticipate a quicker than previously foreseen departure from non-traditional policies.

Throughout the period in question, commencing in late November, market players displayed acute sensitivity to potential shifts in central bank communications. As anticipated, the Federal Reserve increased the federal funds target range by 25 basis points in December, progressing mostly according to its balance sheet reduction plan. In Europe, the ECB remained consistent in its policy direction, retaining its forward guidance, which encompassed an indefinite end-date for its asset purchase program (APP). When faced with a rise in long-term yields, seemingly challenging its yield curve control policy, the Bank of Japan intervened with a proposal to purchase an unlimited volume of long-term government bonds.

These market fluctuations were set against a backdrop of prolonged US dollar depreciation during the majority of this period, persistent easing of credit terms, and robust risk-taking across numerous asset categories. A short-lived rush to safety, coinciding with the zenith of the stock market's instability, barely bolstered the dollar. The Fed's consistent policy tightening and the recent drop in equities didn't correlate with expanded corporate credit spreads, which lingered at historical lows. The demand for assets from emerging market economies (EMEs) remained robust. Stock markets swiftly regained stability, reducing their deficits. Concurrently, bond investors grappled with gauging the cumulative effects of a changing inflation perspective and the ambiguous future net provision of longer-term securities.