The US share market has plateaued since early August, with rising bond yields creating headwinds for shares/equities. Nevertheless, the US market has been supported by technology company performance, relatively strong corporate earnings, and resilient economic activity. This is despite the unresolved tensions in the Middle East and concerns that central banks may need to keep interest rates high for longer.
The NZX50 has struggled since the RBNZ increased the OCR at the beginning of September, with the prospect of more increases to come. Higher interest rates and elevated energy costs have created challenges for companies sensitive to borrowing costs, while the weaker New Zealand dollar has provided some support for exporters.
The ASX200 is facing similar pressures from higher borrowing costs, and a softer housing market. Banks, property companies and consumer-related businesses were more exposed to these conditions, while energy companies benefited from elevated oil prices.
Bond yields have increased in recent months due to concerns over the ability of central banks to contain inflation. Higher yields are associated with lower bond prices, making them more attractive both from a price and yield perspective.
Inflation remains a risk, but continued growth, improving corporate earnings and ongoing business investment suggest the broader economic outlook should continue to provide support.
Upcoming elections in the US and New Zealand could contribute to short-term volatility, although it is too early to assess any medium-term implications for investment markets.
The broad theme is that rising interest rates have put pressure on bond and share markets in recent weeks. This is providing a challenge for funds across the board:
It is hard to know if there will be bumps ahead with the US mid-term elections only weeks away on 3rd November. The election may cause volatility in share markets if it results in a divided government, or a contested result. This hasn’t always been the case, but there seems to be less willingness for the parties to compromise in the present environment, which could lead to greater uncertainty and to disruptive political standoffs may hamper the ability of the US government to function effectively. This may be a scenario in which markets react negatively to the potential for prolonged political conflict, budget disputes, and uncertainty over the ability of government to address fiscal issues.
Financial markets generally factor such outcomes into expectations well before election day, but for the present the focus still appears to be elsewhere. Indeed, the broader theme in the US is that the market has been supported by relatively strong corporate earnings and resilient economic activity.
The outlook for share markets is supported by good growth in the US and the significant investment in Artificial Intelligence, which is benefiting many sectors including technology and industrial companies. Dampening the outlook is mixed growth outside of the US and sustained high oil prices, which could lead to higher inflation, higher interest rates and lower economic growth.
Bond yields have increased in recent months due to concerns over the ability of central banks to contain inflation. Higher yields are associated with lower bond prices, which has put downward pressure on fund values. However, lower bond prices now make them relatively attractive both from a price and yield perspective.