Dominant Themes Prevail
The dominant trends that have been in place since the start of the year remain the primary driver for asset values and market volatility. In particular, the continued weakness of oil prices is driving wide reaching discussions on the potential for a major slip in global growth. This unrelenting pressure on oil has visibly assisted in driving negative headline inflation readings around the world, which in turn has caused the collapse of already benign forward inflation expectations. As the chart below indicates, the phenomena of collapsing inflation expectations is not an issue limited to the U.S and is far more acute in Europe and, of course, Japan, which has had to contend with deflationary pressure for decades. At the moment, the central bankers in the strongest of the G-4 economies, the U.S. and UK, have kept a brave face, maintaining that lower oil prices will only have transitory implications and are ultimately accretive to their growth profiles. However, collapsing yield curves around the world indicate the market’s skepticism over these claims, with sovereign yields the best performing asset class so far this year, with practically every other non-fixed income security posting negative returns. More striking has been the flattening of global yield curves, which has pushed 30-year treasury yields to their lowest rate ever. For posterity sake, and so we can refer back to this at some later time when hopefully we will laugh at these numbers, the following are the current 10-year sovereign rates: U.S. – 1.82%, Germany – 42 bps, France – 65 bps, Italy – 1.72%, Spain – 1.54%, UK – 1.5% and Japan – 24 bps.