The Cambridge Weekly – 29th August 2023

The Cambridge Weekly – 29th August 2023

Transcontinental growth divergence

We don’t seem to be able to get away from writing about how bond yields have been driving equity markets due to their influence on underlying valuation dynamics. We wrote about it the previous week, on many occasions over the past two years, and we have to say that last week is no different. However, whereas we have previously generally commented on yields rising, yields ended lower last week.

Not much between the EU and UK

We wrote the previous week that, after being the best performing currency of the year so far, sterling looked vulnerable. This sentiment was echoed by the Financial Times last Monday and, as if like clockwork, the pound fell against the US dollar into midweek. The overall fall is very slight – with the sterling-dollar rate being only just below where it started last Monday – but this covers up a sharp intraday drop during last Wednesday’s trading.

Is Japan’s central bank ice age melting at last?

Japanese bond yields rose to their highest level in nine years this week. After a global bond sell-off over the last few weeks, and a change in Bank of Japan (BoJ) policy that some commentators described as game-changing, the yield on 10-year Japanese Government Bonds (JGBs) has risen to the ‘unaffordable’ level of – wait for it – 0.68%. UK and US investors would be forgiven for being a little underwhelmed by the not very massive return. US 10 year Treasury yields, the reference point for global bond markets, peaked above 4.3% at the start of this week, while our own 10-year gilts reached higher than 4.7% last week.