The conflict in the Middle East has had a sombre impact on financial markets in the recent week as investors are grappling with a surge in global geopolitical risk. RBC BlueBay Asset Management points out that this has led to a rise in market volatility and a flight to quality investments, pushing down yields.  

”These events have helped to push Treasury yields lower over the past week. However, in assessing price action to date, it is notable that movements in oil prices have been relatively contained, and risk assets themselves have broadly stabilised after a dip at the start of the week,” writes Mark Dowding, Chief Investment Officer at BlueBay. 

Furthermore, the asset manager observes that the US inflation figures closely align with what the market anticipated. On the bond market, Dowding says that some managers, formerly engaged in long-duration trades, have shifted their perspective towards curve steepening. This adjustment reflects their anticipation that longer-dated bonds will likely underperform.

He also briefly discusses the impact of the conflict in the Middle East on the Eurozone’s bond market and sovereign spreads. “In the Eurozone, bunds have continued to broadly track moves in Treasuries. In the wake of supply, sovereign spreads have pushed wider in recent weeks, with the Italy BTP spread rising to a level in excess of 200bps,” says RBC. 

“However, we don’t see a strong catalyst to drive price action in spreads much wider than this, and we are inclined to think we should remain in a range trading environment over the coming week,” opines the asset manager. 

Dowding then sheds light on the foreign exchange markets where a less hawkish stance from the FOMC has seen the dollar trade softer, though its strength is questioned. Apart from this, the asset manager discusses the trading behaviour of the Israeli shekel before highlighting that in emerging markets, a turn in the dollar and US rates has eased pressure on some currencies.

All in all, the asset manager emphasises a cautious approach due to increased uncertainty in global markets. “Broadly speaking, we remain content to maintain risk at modest levels and look to take opportunities to add or reduce exposure if short-term price action appears to overshoot in either direction,” concludes RBC.

Read the full insight here.