We see the new regime of greater volatility playing out: higher interest rates, stagnating activity and structural forces set to push inflation back up. Flip-flops in the market narrative make that clear. 

We‘re in an unprecedented macro environment that is driving constant shifts in the market narrative: from hopes of avoiding recession to fears good macro news could be bad for markets in just a few months. We see the market moving with data as if we’re in a normal business cycle.

Sovereign bond yields have surged this year, with U.S. long-term yields hitting 16-year highs last month. We prefer short-term government bonds over credit. We go underweight high quality credit on a strategic view of five years and longer and trim our overall underweight to sovereign bonds.

U.S. corporate earnings have stagnated over the past year even as Q2 earnings improved a bit on better profit margins.

Last week’s bond yield jump and stock tumble underscore we’re in a new regime of greater volatility. A renewed focus on U.S. fiscal challenges and surprise policy tightening in Japan have stirred up volatility in developed markets (DM).

The Bank of Japan surprised markets last week after it tweaked its yield curve control policy again, joining a tightening wave across developed markets (DM).