Financial markets started the year on a nervous note, with political issues and global events drawing investors’ focus.
In US politics, tensions have grown between the White House and the Federal Reserve. The Fed cut rates by 0.25% in December, but President Donald Trump has openly criticised its cautious approach to further cuts.
The administration, aiming for stronger economic growth before the midterm elections, has decided to sue Fed Chair Jerome Powell. Many see this as an effort to limit the central bank’s independence.
This move made markets uneasy, causing Treasury yields to rise and putting pressure on stocks, especially in the technology sector, which relies on low-cost financing for investments in artificial intelligence.
Geopolitical tensions add to market unease
Geopolitical risks have also come back into focus. Markets have responded nervously to the US getting involved again in Venezuela and to talk of possible tensions between NATO members over Greenland.
In this environment, the US and European stock markets stayed fragile. US stocks rose about 1.4%, while EMU equities went up by around 3.2%.
Other regions did better. Emerging markets gained from a weaker US dollar, which lowered imported inflation and made it easier to manage dollar-denominated debt. This helped support riskier assets.
Bond markets and perceptions of US debt
Bond market movements were mostly steady. Worries about the Fed’s independence and talk that European investors might cut back on US Treasuries affected sentiment, briefly raising the 10-year yield to 4.3%.
We think these fears are exaggerated. Right now, there is no real alternative to US Treasuries as the main support for the global financial system, and no strong substitute for the US dollar.
Also, if there were major market disruptions, weaker markets would likely suffer more, while the US would remain more stable.
Finally, the idea that foreign demand for US debt is falling is not backed by the data. In November, foreign holdings hit a record USD 9.4 trillion, mainly due to higher private demand. Despite what many believe, investors’ interest in US debt has actually grown under the current administration.
Our portfolio includes both US bonds and stocks. You can see the full breakdown below:
