It’s a sour end to the week for markets. Just as emerging markets (EM) were beginning to see some signs of stability, a surge in US Treasury bond yields (hitting a high of 3.23%) acted to fuel another round of pressure, pushing bond yields higher globally while denting equity market sentiment. As a result EM equities took another beating and EM currencies fell against a resurgent USD.
The surge in US yields followed a run of strong US data including a gauge of service sector sentiment (ISM non-manufacturing index hit a new expansion high) and strong private sector jobs data (ADP jobs report). Constructive comments from Fed Chairman Powell on the economy, supporting expectations that US interest rates will be hiked again in December, added to the upbeat mood on the economy. At the time of writing attention is focused on the US September jobs report which is unlikely to detract from the upbeat US growth story.
US-China tensions are another factor weighing on sentiment. While there has been no sign of any progress on trade talks even as the US agreed trade deals with Canada and Mexico, criticism by US Vice President Mike Pence on Chinese policy, has weighed on Asian markets. There appears to be no sign of any appeasement between the two countries, suggesting that tensions will not easy anytime soon.
Any hope of a recovery in risk assets especially in emerging markets as we go into the final quarter of the year are beginning tofade. After losing ground over much of September the USD has bounced back with a vengeance, while US assets continue to outperform much of the rest of the world, attracting even more capital. While heavy long USD positioning and increasingly stretched US equity valuations hold risks against further gains in both, markets are not yet willing to run from US assets.