• January 7th, 2019
• By Midsilver Investment Limited

During the timeframe beginning in mid-September, financial markets experienced significant fluctuations, culminating in a pronounced downturn. Asset values universally declined, and by October, US government yields had expanded only to later subside as the liquidation of riskier assets intensified. Market turmoil was characterized by increased volatility and surging term premiums. By December, another wave of market disturbances emerged, this time marked by declining yields. This revaluation transpired amidst ambiguous global economic indicators, a continual tightening of financial conditions, recurring trade tensions, and escalating political ambiguity within the euro zone. These developments underscored the delicacy of central banks' efforts towards policy standardization amidst a complex policy landscape.

In the United States, financial conditions slightly constricted. Throughout October, the 10-year US government bond yields consistently hovered above the 3% mark, a level previously unseen in the past year. These elevated yields continued into most of November, propelled by real yields, only to descend below 3% in early December. Risk premiums, including the term premium, ascended, and the pursuit of yield diminished. Led by the tech sector, US stock valuations plummeted in October, in spite of positive quarterly earnings reports. Stock values displayed volatility in November and experienced another dip in December. The uncertain outlook on future performance, amidst trade disputes, global downturns, and the Federal Reserve's commitment to gradual policy adjustment, seemed to unsettle investors. Moreover, the gap in corporate yields widened, especially for lower-rated credit segments.

The re-evaluation of risk assets had global ramifications. US stock markets negatively influenced their counterparts in both developed and emerging economies, resulting in a comprehensive stock market downturn. In Europe, corporate yield gaps also saw a notable increase, particularly within financial sectors. Specifically, bank valuations faced renewed scrutiny amid escalating political uncertainties, most prominently around the Italian budget and, to a lesser degree, Brexit.

Post a summer characterized by capital departures and nation-specific financial strains, emerging market economies (EMEs) witnessed tight yet stable financial conditions. Compared to the US dollar, currencies further depreciated early in the quarter, anticipating tightening actions by the Federal Reserve. However, a significant reduction in oil prices brought some respite to nations dependent on oil imports, especially after a unique phase where both oil and the dollar were on the rise. Generally, portfolio outflows from EME fixed incomes reduced, and the spread on local currency bonds relaxed.