Somehow investors have accepted the return of market volatility that started back in January this year. This is somehow back to normality. However, the big question is, can investors live with a challenging macro environment that could impact bonds and equities in the coming months. Investors should assess the trading risks and opportunities in equities and bonds for the coming months. The global economic macro picture is still promising but the steady withdrawal of central bank stimulus, led by the US and Europe along with rising global trade tension and concerns that economic growth may have peaked all shape as influencing investor in the coming years.

Yields on government bonds in the developed economies have been trading in a narrow range since the start of the year. The earlier weakness in government bond prices were reversed because of potential global trade tension and some sign of economic weakness in the Eurozone and the UK. US government bond yield is the only one that has been seeing a sell off and yield on 10-year US treasury has approached the 3 percent level.

As for equity markets that have been experiencing the return of higher volatility since the mid-January of this year, the question is whether technology companies will report good earnings for the first quarter and will they recover from last month's stumble. Equity investors should look through the reported earnings to distinguish the winner from the losers and position themselves for the rest of the year.

Tech sector the best

The technology sector remains the best sector to deliver good results as they are most immune from fundamental changes that has been affecting other business sectors. Although the sector might offer the greatest investment opportunity, investors are advised to pick the right stocks. The latest weakness in the technology sector has represented a buying opportunity given their business sustainability and quality of earnings. At present the technology sector offers compelling value compared to the broader market.

Whereas, the return of equity market volatility has been clear, the signals from the bond market is unclear and inconsistent which may lead to investors questioning the central banks' on going monetary policies. US government bonds must deal with multiple factors that may have undesirable impact on economic growth. Yields on US treasury bonds have been rising over the past year. Yield on 2-year US treasury bond has risen from 1.25 percent to nearly 2.5 percent. This increase can easily be justified by the strong economic growth and the tax cut that has been passed by congress. In my opinion, rising rates reflect economic growth and the risk of inflation. Investors should remember that present yield levels are not high in historical terms but the speed of its increase could be signs of troubles ahead or it is just telling us that the market now expects the Federal Reserve to go through with raising rates soon.

Investors in long dated US government bonds are not prepared to bet on higher yields yet. The longer dated US government bond such as the 10-year bond yield is less driven by Fed Funds rates, and is more driven by expectations for inflation and growth in the long term. The yield is struggling to break the 3 percent level. This means that investors either not convinced about the future inflation expectation or they see slower economic growth in the coming months. At present the shape of the yield curve is flat and it has been narrowing. At present the yield on the 10-year US treasury bond exceeding the two-year yields by less than 0.5 percentage points, it has not been this narrow since before the crisis. That implies sluggish growth and low inflation long into the future. All of this tells us that rates will go up but future inflation is no longer a threat. Which may mean the Federal Reserve might reconsider its stance on raising rates.

By Hayder Tawfik