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USD and EUR 10-year bond yields on the rise: October 2023 Market Commentary

Global Macro:

In September, although the US central bank decided not to hike its Fed funds rate, its communication strongly highlighted the persistence of inflation and the potential need for further rate hikes to fight it. As a result, 10-year government bond yields in the US and Europe continued their ascension, reaching 15-year highs, i.e. 4.7% in USD and close to 3% in EUR.

In the US: Growth was softer at 2.4% with inflation slightly increasing for the 3rd month, reaching 3.7% from a yearly low of 3% in June. Inflation may be underpinned by oil prices, which surged 30%, from $70/bbl before the summer to $90/bbl in October. As such, interest rates may stay higher for longer in the US, perhaps until year end, providing a window of opportunity for investors to lock substantial yields on long durations, such as 10 years. Inflation is volatile, yet its trend is down and consequently interest rates are likely to decrease in 2024.

In Europe: Growth remains subdued at 0.5% and inflation elevated at 4.3% albeit declining. The European Central Bank (ECB) is the only major central bank that raised its key deposit facility rate by 25bps to 4% in September. This is the 10th rate hike in a row to fight persistent inflation in the Eurozone. The situation is aggravated by the 30% surge in oil prices over the past 3 months. According to the ECB communication, we may be close to the end of the rate hiking cycle in Europe. However, interest rates are expected to remain high for a while, restraining the economy, with the risk that Europe enters a recession.

In China: Sentiment is improving in China with year-on-year growth steady at 6.3% for now. China has the fastest growth among large economies, although it is expected to drop towards 5% by year end. Inflation remains close to zero, at 0.1%. China’s central bank, the People’s Bank of China (PBoC), is maintaining its reverse repo rate at an all-time low of 1.8% providing easy monetary policy and financing to Chinese corporations, in particular the troubled real estate sector.

Financial Markets:

Equity: In September, global equity markets lost a few percentage points on rising long-term yields (S&P 500 -4.9%; Nasdaq 100 -5.8%; Euro Stoxx 50 -2.8%; HSCEI -2.9%). Fixed Income: The 10-year US yield kept its upward momentum and gained 48bps to 4.57%, while the 10-year German yield rose 38bps to 2.85%. As a result, High-Yield bond prices in USD and EUR contracted 1-3%. Currencies: The greenback continued to appreciate against most currencies in September amid rising US interest rates: EUR -3.4%, GBP -4.0%, AUD -0.8%, CNY -0.2%, JPY -2.2%. Commodities: Gold lost 4.2%, weakened by higher US interest rates. Oil prices went up 8.5% as OPEC+ is expected to carry on production cuts.

Equity: Risk-off mood as interest rates keep rising

Global equity markets have declined since August with a year-to-date performance still close to +10%.

In the US:

In 2023, US stocks (S&P 500) gained 11.7% as they benefitted from persistent growth and falling inflation. As recession is expected to be avoided in the US, the equity downside might be limited. Nonetheless, the rally stopped in August and stocks have been retreating for 2 months. We note the surge in artificial intelligence (AI) investment has provided structural support to the tech sector. However, stock valuations are rich in the US, reducing the potential for upside. Catalysts will be needed for the US equity market to go higher, such as the confirmation of a rebound in earnings estimates for 2024 and potential Fed rate cuts next year.

In Europe:

The Euro Stoxx 50 index lost 2.8% in September, albeit still positive for the year at +8.4%. This is quite a good performance considering the lack of growth in Europe, the recession in Germany, the Eurozone’s negative trade balance since Covid, rising oil prices, and of course the war in Ukraine. We believe the European equity potential is likely to be capped until these negative factors get resolved.

In China:

Chinese stocks (HSCEI) retreated 2.9% in September with a negative year-to-date performance of -8.3%. The crisis in the real estate development sector is being managed by Chinese authorities and it seems current equity prices fully integrate the negative sentiment regarding the Chinese equity market. As the government and the PBoC are providing strong measures to support the economy, which is still growing at more than 6% per year, the market bottom may be behind us. We believe the stock price downward retracement is an opportunity for long-term investors looking for asset growth, substantial income (around 4% dividends) and de-correlation with Western markets. Given attractive equity valuations and earnings upgrade expectations, we believe mainland Chinese and Hong Kong equity valuations are likely to increase substantially within the next 12 months.

Fixed Income: The window of opportunity remains for bonds and deposits

With seemingly no end to the US government spending program, Treasury yields have continued to rise, reaching 15-year highs, with the 10-year US Treasury yield at 4.7%.

Western central banks have not ended their rate hiking cycle yet. However, based on their communication, we expect the hiking cycle to be over by year end. As inflation is declining around the world, at some point in 2024, central banks will start reducing rates again to support their economies.

We believe there is a window of opportunity not seen over the past 20 years where it is now possible to receive significant income from cash deposits: 5.50% in USD and 3.75% in EUR annualized for a duration of 3 to 6 months. High interest rates can be locked in for longer periods as well by investing cash in bonds from large investment grade banks, which can provide an income per annum of 6% net in USD and 4% net in EUR for a duration of 2 to 10 years.

Currencies: USD rally fueled by rising Treasury yields

EURUSDVolatile within the [1.05; 1.10] range with downside risk

The recession risk has increased in Europe. Further economic degradation may push EURUSD below 1.05, outside its 2023 range of [1.05; 1.10]. The strong 30% rebound in oil prices over the past 3 months may deteriorate the negative trade balance further, which could weigh on the EURUSD. However, the relatively high ECB deposit rate of 4% is a counterbalance to these negative economic factors. In these circumstances, we believe EUR hedging for exporters towards Europe is a must.

USDRMB: Stabilized around the 7.30 long-term resistance

The USDRMB is pulled by two opposite forces. On one hand, China’s growth is lower than expected and the PBoC is progressively lowering its key interest rate to underpin the economy: this has a short-term weakening effect on the RMB versus USD. On the other hand, China’s growth (+6.3%), trade balance, and inflation (close to zero) are greatly in favor of the RMB: this has a structural, long-term, strengthening effect on the Chinese currency. That is why we believe the bearish trend of the USDRMB may be about to resume by year end and may bring the USDRMB back below 7.00 within the next 12 months.

USDJPY: The rising USDJPY alarms Japan

USDJPY rose close to a 40-year high, at 149.70. The short-term interest rate differential between Japan (-0.10%) and the US (+5.50%) is the main driver of the USDJPY strength. The market expects the Bank of Japan (BoJ) to intervene if USDJPY exceeds 150.


Oil: OPEC+ is committed to restricting oil production. As such, oil inventories fell by 76.3 million barrels in August and are now standing at the lowest level since July 2022, according to the International Energy Agency (IEA). As a result, oil prices rose 8.5% in September.

Gold: Gold prices went down to USD 1,850/oz as US interest rates kept on rising in September and the US dollar strengthened. However, we note all central banks together are purchasing around 1,000 tons of gold per year, the highest pace in half a century, thus providing a “floor” to gold prices. We think this level may be a buying opportunity in front of what we believe is a bullish context for gold: US interest rates are stabilizing, USD will resume its bearish trend at some point this year, the geopolitical uncertainty remains elevated (US-China tensions, war in Ukraine), and central banks have an ongoing gold purchasing program to diversify from the sanction-prone USD.


  • Russia-Ukraine war escalation: A worsening of the war would affect Europe the most, and if the Russian army crossed the Belarus border, which is 150km north of Kiev, EURUSD could drop fast towards 0.90. In addition, the US and Asia could suffer a stronger economic slowdown amid surging commodity prices.
  • US-China tensions: US-China friction remains strong, with increasing tension around Taiwan and the South China Sea.
  • Recession: So far, the US has escaped recession although growth has been tepid, while in Europe anticipated growth lies within the [-0.5%; +0.5%] range. By contrast, Asia is experiencing stronger, sustainable growth, fueled by China’s rapid recovery (5.5% expected growth for 2023). Depending on how corporates and governments navigate the new inflationary period with higher interest rates, recession remains a key risk to monitor.


  • Income from safe cash deposits: Cash can be safely placed in cash deposits and earn annualized net interest, e.g. over a period of 6 months: USD 5.50%, EUR 3.75%, GBP 5.25%.
  • Income from Investment Grade bank bond issuers: Major banks are implicitly protected by central banks as demonstrated during the Credit Suisse crisis where actual bonds (not AT1) remained secured. Bonds have already mostly integrated the central banks’ ambitious interest rate hiking cycle. Investors can enjoy a substantial yield from a diversified bank bond portfolio of 2-year duration: USD 6%, EUR 4%, GBP 6%.
  • Japanese yen: The JPY is extremely undervalued, close to a 40-year low. The anticipated change in BoJ’s monetary policy could trigger a re-appreciation of 10% to 15%.
  • Nuclear energy: We believe the nuclear sector will be instrumental in the world’s decarbonization efforts. To achieve fossil fuel reduction targets, the nuclear power industry’s safety standards need to be brought to the next level, for instance by using new technology to recycle uranium. New “green” nuclear energy is the number one priority of President Macron in France, while being high on the agenda in the US and China, which will build 150 nuclear power plants in the next 15 years.
  • Defense and security: The war in Ukraine has triggered massive investment in military defense and the overall security sector – including cyber, food, energy and semiconductor supply security – in Europe and around the world.