Standard Chartered – Global Market Outlook, Nov 2023

The ongoing debate in financial markets revolves around whether US bond yields have reached their peak, considering the strong US economy. Standard Chartered maintains an optimistic outlook on high-quality government bonds and recommends overweighting them in their foundation allocations. They expect equities to face limited movement due to positive seasonal trends and capped bond yields, along with declining economic surprises. They suggest focusing on US and Japan equity markets and adopting a diversified approach to Asia ex-Japan equities. Geopolitical risks, specially disruptions to oil supplies in the Middle East, could impact financial markets. While an escalation is not expected, oil-correlated assets can serve as a hedge. The main point of contention in the financial market over the past month has been the rise in US government bond yields. The increase in the US 10-year government bond yield to 5% raises questions about the bonds vs equities trade-off. Higher bond yields tighten financial conditions, and it is debated whether this shift significantly affects the trade-off, and if momentum can push yields further up before they peak. Additionally, concerns arise about potential consequences in the face of these high yields. On one hand, bond bulls argue that the current 5% yield on the 10-year bond already reflects the Federal Reserve's extended pause at current policy rates, and the significant real yield of around 2.5%, which approaches pre-2008 range highs. On the other hand, bond bears argue that in order to normalize the yield curve, the 10-year yield needs to surpass the Federal policy rate of 5.5% in an environment of a sustained pause and a still-resilient US economy. This scenario would differ from a typical late cycle, where the yield curve normalizes due to the sharp decline in short-maturity yields as the Fed decreases policy rates during a downturn. For a more detailed analysis, refer to the Perspectives section.