Global financial conditions have been relatively stable following recent volatility. Goldman Sachs shows conditions have tightened in recent weeks, though remain more accommodative than a year ago.

Credit spreads have unwound most of their 2024 compression, though are still low in historical terms. Yields on investment grade and junk bonds remain down 50 and 37 bp respectively since start of July. Meanwhile S&P 500 VIX is back to where it was at beginning of August after spiking to Covid-era high (39), coinciding with rebound in risk sentiment.

However, calm could yet give way to renewed volatility with Reuters analysis showing it takes average 170 sessions for VIX to return to its long-term median 17.6 once 35 level is breached. Weak nonfarm payrolls out of the US underlined heightened market sensitivity to a recession risk/hard landing concerns, which have continued since the inversion of the 2/10yr Treasury yield curve. US junk loans experienced largest outflow since early 2020 in the week ending 7-Aug according to EPFR, as growth concerns put spotlight on lower quality borrowers (FT). Additionally, there is debate on the extent to which the yen carry trade has unwound, leaving the potential for more yen carry unwind.  This and the impending US elecion remain a near term risk.

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