Stocks and bonds down – Gold at all-time highs

As both Equity and Bond markets retreated in synchronised fashion yesterday, the 60/40 portfolio allocation strategy faces challenges. The S&P 500 fell 0.7% to 6,415, the Nasdaq 100 dropped 0.8% to 23,231, with the Dow Jones Industrial Average shedding 0.6% to 45,295.

On a more positive note, Spot Gold (XAU/USD) surged to fresh all-time pinnacles yesterday, peaking at US$3,546. As you can see below, it is quite the chart! The precious metal's rally beyond $3,500 signals a fundamental recalibration of risk perception, underpinned by central bank accumulation, expected policy easing from the US Federal Reserve (Fed), uncertainty surrounding Fed Governor Lisa Cook, as well as global tariffs, and, of course, persistent geopolitical tensions have coalesced to drive institutional and retail demand.

Bond rout deepens

The bond market is fairly quiet this morning; however, yesterday was anything but, with investors continuing to price in a higher term premium.

Global long-duration debt stress arises from elevated government borrowing, high debt levels, and political instability. For example, political turmoil in France, the UK, and Japan, as well as increased expenditure in Germany, raises doubts about fiscal health and governments’ ability to address their debt. Ultimately, the bond market is telling us that it is concerned about the current situation.

The FP Markets Research Team released a brief note on the UK bond market yesterday, showing that the ‘yield on 30-year borrowing costs reached an eye-popping level of nearly 5.700%, breaching thresholds not witnessed since 1998 and marking a watershed moment for UK sovereign debt markets. Concurrently, the yield on the 10-year note jumped to a high of 4.806%, inching closer to 4.815% – a level that, on several occasions, has prompted bond buying since this year’.  

It was also a particularly busy day in other UK markets. In addition to bonds selling off, which places GILT yields north of Liz Truss’ mini-budget debacle, Equities took a substantial hit. This was evident across mid-cap Stocks – the FTSE 250 dropped more than 2.0% on the day, while the benchmark FTSE 100 ended lower by 0.4%. The British pound (GBP) also navigated deeper waters, down 1.1%, and is moderately on the back foot in early European trading this morning.

Elsewhere, the 20-year Japanese government bond (JGB) yields recently reached levels not seen since 1999, while 30-year yields hit record highs since their inception. The moves reflect growing concerns about excessive government spending requirements and declining confidence in the sustainability of sovereign debt.

US 30-year Treasury yields remained close to the 5.000% threshold following Tuesday's sharp spike, which contributed to weakness in the Stock market. European bonds fared no better, with longer-dated German bonds deteriorating for a fifth consecutive session.

Eurozone inflation muted – US Manufacturing sector remains in contraction, US JOLTS eyed

Eurozone August YY CPI inflation data rose to 2.1%, nudging a touch above the European Central Bank's (ECB) 2.0% target and bolstering market expectations that the ECB will hold ground when it meets next week. Interestingly, investors are not expecting the central bank to move at all this year. YY core inflation – which excludes food and energy – remained unchanged at 2.3%. The data certainly supports the ECB’s cautious stance.

Meanwhile, the US manufacturing sector contracted for a sixth consecutive month in August; the ISM (Institute for Supply Management) manufacturing PMI (Purchasing Managers’ Index) increased to 48.7 (from 48.0 in July), though fell short of the market’s median estimate of 49.0. The prices paid sub-index came in slightly lower at 63.7, down from 64.8 in July and below market expectations of 65.3. Meanwhile, the employment sub-index rose to 43.8 (from 43.4), but undershot the market forecast of 44.5. ISM respondents offered broad negative commentary – particularly concerning the construction industry and uncertainty surrounding tariffs.

The July US JOLTS report (Job Openings and Labor Turnover Survey) lands today at 2:00 pm GMT. Markets expect job openings to slow to 7.378 million, from 7.437 million.