Standard Chartered expects US bond yields to become increasingly capped as inflation concerns ease, creating a supportive backdrop for equities while renewed US dollar weakness has prompted the bank to reinstate its Overweight stance on gold.
In its latest market outlook, the bank maintained an Overweight allocation to US and Asia ex-Japan (AxJ) equities, supported by expectations of lower bond yields and renewed momentum surrounding artificial intelligence (AI).
Standard Chartered said risky assets have rebounded despite lingering concerns over US government bond yields. Global equities have risen, although much of the gains were concentrated in the early part of August, while the rise in longer-dated US Treasury yields has paused.
Gold has also rebounded while the US dollar has weakened.
The bank believes inflation concerns have room to recede, with shorter-maturity US government bonds likely to be the biggest beneficiaries if yields move lower.
“The recent cooling in the US inflation data and a lacklustre job market point to less, rather than more, inflation risk ahead,” Standard Chartered said.
This supports its expectation that inflation and bond yields are more likely to decline than rise from current levels, consistent with the bank’s soft-landing outlook for the US economy.
Long-Term US Yields Remain Key Concern
The bank noted that inflation, rising government debt and bond supply have been at the centre of concerns surrounding the increase in longer-term US Treasury yields.
The 30-year US government bond yield has risen by around 40 to 50 basis points this year, prompting a response from the US Treasury as authorities seek to signal their desire to contain the increase.
While inflation concerns are frequently cited as a key factor behind rising yields, Standard Chartered believes the concentration of the increase at the longer end of the yield curve suggests other forces are also at work.
Among them is the continued expansion of US national debt, which has heightened investor sensitivity towards the government’s borrowing requirements and the supply of Treasury securities.
Technical factors have added to the pressure, including the relative absence of some major sovereign buyers.
Significant bond issuance by hyperscalers in the investment-grade corporate debt market has also contributed to competition for investor capital.
Despite these concerns, Standard Chartered sees scope for market worries over inflation to diminish.
Oil prices remain a potential risk to this view, particularly given geopolitical tensions in the Middle East. However, the bank expects crude prices to remain around US$90 per barrel for now, provided there is no significant new escalation in the conflict.
AI Momentum Supports US, Asian Equities
Against the improving yield backdrop, Standard Chartered maintained its Overweight stance on US and Asia ex-Japan equities.
The bank said renewed momentum in the AI investment theme provides another catalyst for equities, with positive signals surrounding AI monetisation helping revive investor confidence in the sector.
Lower or capped bond yields are particularly important for growth-oriented stocks, as elevated yields can weigh on the valuation of companies whose earnings are expected further into the future.
The global financial sector could also benefit from the prevailing interest-rate environment, with Standard Chartered pointing to a steeper yield curve as supportive for the sector.
The combination of easing inflation concerns, potentially lower bond yields and renewed AI momentum therefore provides a favourable setting for selected global equity markets, according to the bank.
Gold Back To Overweight As US Dollar Weakens
Standard Chartered has also reinstated its Overweight allocation to gold as weakness in the US dollar resumes.
The bank sees both cyclical and structural support for the precious metal.
Continued gold purchases by emerging-market central banks should provide a longer-term source of demand, while expectations for renewed US dollar weakness offer an additional tailwind.
A weaker dollar typically improves the relative attractiveness of dollar-denominated gold for investors using other currencies, while falling bond yields can reduce the opportunity cost associated with holding the non-yielding precious metal.
Standard Chartered’s latest positioning therefore favours a combination of US and Asia ex-Japan equities alongside gold, underpinned by its central view that US inflation concerns have room to ease and Treasury yields are more likely to move lower than higher.
The bank’s outlook, however, remains sensitive to oil prices and geopolitical developments, with a significant escalation in the Middle East potentially challenging its expectations for easing inflation and lower bond yields.
