The surprise of the beginning of the year
When the minutes of the December Federal Open Market Committee (FOMC) meeting were published in January, the market was surprised by the news that some officials, in addition to raising rates and start the “tapering” they wanted to start with a reduction of the balance sheet, which is known as “quantative tightening” (QT), a process that was thought to only take place in 2023.
Given this surprise, a rapid correction was caused in the stock markets, falling in a few weeks during January, the Dow Jones 6%, the S&P500 9% and the Nasdaq 14%. At the same time, the different types of debt (Treasury, high quality, high yield and emerging) also behaved downwards.
Russian invasion of Ukraine
Adding more uncertainty to 2022, came the Russian invasion, which fed back the problem of inflation, given the particular impact that both Russia and Ukraine have on some commodities and also because of the sanctions that were applied against Russia. At the same time, the war event caused a typical “risk-off” effect which was accompanied by an increase in “cash” in portfolios, purchase of US Treasury bonds and gold. The risk reduction process in the portfolios had a particular negative effect on emerging debt, which had already been punished by what was previously mentioned and in turn had begun its martyrdom around September 2020 from the Evergrande event in China.
The uncertainty generated about the future of the economy made us think that perhaps the FED would not be encouraged to face monetary tightening as it had been proposed prior to the invasion.
Limiting the war effect and the successful March FOMC
As the market assumed that NATO would not enter the conflict directly and that a nuclear event would not occur, risk assets began to recover. In turn, at its meeting on March 15 and 16, the FED’s FOMC managed to regain credibility in that it would have the necessary conviction to do what was pertinent to direct inflation towards its long-term objective. However, at that meeting the rate was only raised by 25 basis points.
Treasury Yield Curve Inversion and the Risk of a Recession
The happiness was short-lived, as the market began to think that if the Fed were to apply all the necessary hardness, the economy could enter a recession. Powell himself in a meeting at the NABE (National Association of Business Economists) recognized that conducting a soft landing in the current context would not be easy, but that the FED had already achieved it in 1965, 1985 and 1994.
A few days ago, when the inversion of the curve in terms of the 10-year and 2-year rates was recorded, the concern was heightened, given that the times this happened, a recession subsequently took place, although they tended to develop at least 18 months later. For some analysts, a more accurate predictor is the spread between the 10-year rate and the 3-month rate, which is still clearly in positive territory. Therefore, it seems premature to worry about a recession, but the risk is certainly installed.
Lael Brainard seemed to break everything
The statements of Brainard (member of the board of the FED) once again generated volatility in the markets, establishing that the Fed could begin to reduce its balance sheet in May and that it would do so at “a rapid pace”. He also indicated that interest rate hikes could come at a more aggressive pace than the typical 25 basis point increases. 0.25 percentage points. Although the first impact was negative for all types of stocks, those related to the “value” sector have stabilized and those related to the “growth” sector have weakened the most.
Conclusion of the US monetary scenario
2022 will continue to be a year with volatility in the markets, more specifically it will be difficult to see the VIX (volatility index) below 20%. The best scenario that can be expected for the S&P500 is lateralization, like 2015/2016 when a process of monetary tightening similar to the current one began. At the same time, it is clear that a context of rising rates and the risk of recession will not be a friendly context with debt and that the market will become more selective in the analysis of credit risk.
Consequences on Argentina
The context of rising rates and credit selectivity complicates access to international private credit for both the National Treasury and companies. Clearly, it has been a missed opportunity to have restructured the debt with private parties in September 2020 and not have been able to return to the markets at that time, given that, currently, even though an agreement with the IMF has been closed, the path fiscal consensus, does not look ambitious enough to dispel the doubts that international investors have regarding the need for a new restructuring.
Director of Investing in the Stock Market (IEB)
Source: Ambito
