Financial markets had a turbulent and more volatile month in February, with almost every asset class falling while the US Dollar rose on a trade weighted basis. Notably, after a record streak of fifteen consecutive monthly gains, the S&P 500 fell 3.7% in February. After a particularly strong January, global emerging market equities underperformed developed markets, although emerging market equities continue to outperform developed markets year to date. Global bonds suffered with yields generally rising amidst a better than expected jobs report in the US.

US markets fell sharply early in the month, with the S&P 500 falling 6.2% in the first three days of trading. This followed a strong jobs report, with wage growth beating expectations at 2.9%. With the tightness in the labour market yet to feed into wage growth and subsequently headline inflation, investors have been focusing on wage growth figures in anticipation of the trend reversing. The better than expected data indicated this may finally be the case and investors adjusted their inflation expectations and subsequently their forecast for the timing of future US rate hikes. This initially put bond markets under pressure, before concerns spread to equity markets.

The pattern in market performance during 2017 of strong equities, rising bond yields and a weakening US Dollar continued into January. Notably the S&P 500 produced its fifteenth consecutive monthly gain, with a rise of 5.7%. Global emerging markets continued to perform solidly, returning 8.3%, supported by the strength of the global economy and a weak US Dollar. Global bonds had a more turbulent month, with yields generally rising.

However, as the month progressed there was a distinct change in markets. Indications of continuing global economic growth, particularly in the US following tax reform progress, began to weigh more heavily on bonds with US Treasuries notably affected. 10 year US Treasury yields had already risen from 2.0% in early September 2017 to 2.4% by year-end, but rose quicker during January to end the month at 2.7%, the highest level for nearly four years. Signs of an inflation pickup, especially in the US where wage growth is rising amidst a tight labour market, heightened concerns that bonds were increasingly vulnerable. Towards the end of the month the sell-off in bonds, which spread from US Treasuries through to the UK, Europe, and somewhat to Japan, began to have an impact on equity markets, which retracted some of their earlier gains.