PI Partnership – Jupiter Asset Management
lead to a selling of US treasury bonds and an uncontrolled tightening in US finan- cial conditions. That’s a feature markets have seen time and time again (the most extreme exam- ple being the Covid lockdown volatility in 2020) as US funding its massive current account gets dragged into the mire due to intense global dollar demand. The new Federal Reserve US Dollar lend- ing facilities (Federal Reserve US dollar swap lines and Standing Repo facility) will unlikely be able to prevent it. The steep decline in global sovereign reserves held at the Federal Reserve ominously show this is already happening alongside a deterioration in US treasury liquidity. The unprecedented global condemnation of UK policies in recent weeks is a recog- nition of these stresses.
This all adds another dimension to a com- plex policy backdrop. The central banks continue to try to push down growth to combat inflation with limited success so far. This is being countered by Russia con-
tinuing to fan the flames to boost energy prices (Nord Stream pipeline explosion) to keep up the pressure for winter 2023. Western sanctions on Russia only work to boost energy prices further. In direct geo- political conflict with the US, OPEC cut- ting production to boost oil prices is an alarming new development supporting the Russian agenda. Finally, European governments have unleashed the new financial risk fault line with untargeted stimulatory policies. Tight energy and labour markets will con- tinue to dominate with government debt the loser until global growth is crushed, unemployment rises, and energy prices decline across the board. Rates have moved higher dramatically in 2022 but still none of these factors have been ful- filled. Unless something on the geopoliti- cal stage changes, high bond yields are required to achieve these outcomes mak- ing a persistent bond rally unlikely. Western media focus on Russian battle- field losses ignores the financial weak-
nesses being exploited by Russia against the West. The silver lining of course is Putin is unlikely to escalate into tactical nuclear weapons given that his leverage is improving, not declining, as most think. A dividing line between sovereign bond markets with natural resources and those without is being drawn, blurring the pre- vious ‘developed’ and ‘emerging’ market classifications. Less inflation and reduced fiscal stress for resource independent countries support their bond market valu- ations but for the others, higher yields are needed. As the western bond market bubble bursts, default stress and housing market pain
will be accentuated, impacting
growth outcomes. Whilst the broad-based and front-loaded bond sell off might soon reach its climax, macro-economic diver- gence in economies is only increasing and how central banks and politicians react to their own unique circumstances will determine yield levels, curve shape and foreign exchange prices.
This communication is intended for investment professionals* and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the Fund Managers at the time of writing and are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. Holding examples are for illustrative purposes only and are not a recommendation to buy or sell. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Issued in the UK by Jupiter Asset Management Limited, registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ is authorised and regulated by the Financial Conduct Authority. Issued in the EU by Jupiter Asset Management International S.A. (JAMI), registered address: 5, Rue Heienhaff, Senningerberg L-1736, Luxembourg which is authorised and regulated by the Commission de Surveillance du Secteur Financier. Issued in Hong Kong by Jupiter Asset Management (Hong Kong) Limited (JAM HK) and has not been reviewed by the Securities and Futures Commission. No part of this commentary may be reproduced in any manner without the prior permission of JAM, JAMI or JAM HK. *In Hong Kong, investment professionals refer to Professional Investors as defined under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong). and in Singapore, Institutional Investors as defined under Section 304 of the Securities and Futures Act, Chapter 289 of Singapore.
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