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Vantage Point: War Footing

Welcome to the latest edition of Vantage Point. Coming hard on the heels of a global pandemic, the war in Ukraine will challenge an already fragile world economy in ways that are hard to predict. In our view the interplay between surging commodity prices, the monetary policy response to much higher inflation and lower growth, and the unprecedented scale of financial sanctions, will be key for what is ahead.

 

Featured Insights

Bear Markets: More Pain, Then Gain
 

The history of bear markets makes for gloomy reading. However, this brief note focuses on what we might expect once the -20% threshold has been crossed. How has the market (S&P 500) performed after entering a bear market?
 

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Don’t Blame China for Inflation Damage in the U.S.

The state of global supply chains are widely seen as heavily influenced by developments in China. While it is true that China accounts for a large (nearly 30%) share of global manufacturing and shipping, we believe that it is far from obvious that it “causes” U.S. inflation. We cover some highlights and metrics in this note.

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Super-Sized Hike Shifts Fed Hiking Cycle into Higher Gear

The Federal Reserve (Fed) raised the Fed Funds rate by 75 basis points (bps) on June 15th, to a range of 1.5-1.75%, the largest hike since 1994. The below highlights the takeaways from Chair Powell’s press conference and the updated Summary of Economic Projections (SEP).

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A Deep Dive into QT
 

In this third note of three, we review the arguments behind these opposing views in the previous two, in the hope to provide some clarity for investors as they attempt to navigate markets in the challenging times ahead.
 

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China’s Growth Woes Deepen, Structural & Fiscal Easing to Intensify

Chinese annual growth is set to soften further - with growth to contract in Q2'22 and slow recovery for the year. We elaborate within this note.

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Could QT lead to a steeper yield curve?

In the first note in a series of three on QT we argued that QT will most likely contribute to a flattening of the yield curve. Instead, many financial market participants tend to associate Quantitative Tightening (QT) with a steepening of the yield curve.

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The Impact of QT on Financial Markets

We have written extensively on our expectations for future rate hikes and the peak in US rates. In this paper, the first in a series of three on Quantitative Tightening (QT), we summarize our thinking on QT and its implications for markets.

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Quarterly Stock and Bond Returns in Historical Context

During the first quarter, the main US benchmarks for equity and bonds both declined. During the past several decades, concurrent declines in stocks and bonds are relatively infrequent. This short note puts the recent quarter in historical context.

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Drivers and Implications of a Depreciating Yen

Since the Ukraine conflict began, the Japanese Yen has underperformed all major currencies. See the latest analysis on the drivers.
 

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Yield Curve Inversion... This Time Is Not Different

We believe the possibility of a recession in the US over the coming two to three years is increasing. As such, we take a strong signal from the recent (albeit brief) yield curve inversion and in this note, address how our analysis led to this conclusion.

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China’s Growth, & Global Supply-Chain, Woes to Mount on the Covid Surge

The growth forecast downgrade was prompted by a slew of weakening macro indicators in March -- which we elaborate on in the pages of this note.
 

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Monthly Market Roundup

 

June 2022

Rocky Flat

  • Global equity markets remained volatile as focus appeared to shift from inflation fears to greater concern around growth slowdowns and the prospect of near-term recessions. Yet, inflation is far from tamed with some readings continuing to surprise to the upside and reach new highs.
  • On the policy front, further hikes were delivered but the path of hikes beyond the next several months remains uncertain. Comments from key policymakers moved markets day-to-day as expectations for tightening by year-end fluctuated.
  • The trade-off between slowing growth and heightened inflation may be worsening, but the narrow path to a so-called “soft-landing” remains a possibility, for now.
  • Indeed, activity indicators in many economies forged ahead despite stiff headwinds from elevated inflation and sagging consumer confidence (the former explaining much of the latter).
  • Labor markets, particularly in the US, remain very tight and provide a cushion to tightening financial conditions.
  • China activity began to recover as COVID restrictions lifted somewhat.
  • Overall, global equity markets eked out a slim gain (0.2%). Similarly, the S&P 500 was roughly flat, but the headline return masks large intra-month swings. At one point, the S&P 500 was down ~5% month-to-date. However, the main US index snapped a seven-week slide and ended the month rallying as yields briefly eased back and risk appetite appeared to return.
  • The 10-Year US Treasury yield hit a year-to-date peak in early May, but declined to ~2.8% by month-end.
  • Higher commodity prices and monetary policy divergence continued to drive major foreign exchange crosses.
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Points of View

Fed Meeting Highlights, March 2022

As widely expected, the Federal Reserve increased policy rates by 25 bps, the first hike since 2018. We go into further detail on the highlights.

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Fed Hike is First Step on Long Road

As the Federal Reserve (Fed) is widely expected to raise interest rates for the first time post-Covid following its March 15-16 meetings, we look some important questions.

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ECB Policy: Hawkish but Flexible
 

The ECB delivered a hawkish surprise, during its March 10th policy meeting, despite the Ukraine conflict. We review the implications for macro & markets outlook.

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China Juggles Growth, Reform & Geopolitics

China sets an ambitious growth target for 2022, and policymakers may need to make some compromises.
 

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The Russia-Ukraine war, European energy markets and ECB policy

The Russia-Ukraine war sadly continues. This constitutes the most serious security crisis in Europe in decades and the full repercussions will likely be immense on the global geopolitical landscape.

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Macro/Markets Impact of Russia’s Ukraine Invasion

The Russian invasion of Ukraine has begun. This constitutes the most serious security crisis in Europe for decades. Markets are responding.
 

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Markets after Corrections

Following a recent note on market corrections, this note focuses on the historical rebounds of the S&P 500 from those pullbacks.
 

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Market Corrections in Historical Context

Since the market has been flirting with a market correction in recent days with a >10% decline from the recent peak. We provide a few quick stats to put the decline in a historical context.

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Global Economics and Investment Analysis Group

Meet the minds behind the research.

Shamik Dhar

Chief Economist

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Aninda Mitra

Head of Asia Macro & Investment Strategy

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Lale Akoner

Senior Market Strategist

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Sebastian Vismara

Senior Financial Economist

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Jake Jolly, CFA

Senior Investment Strategist

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MARK-179764-2021-03-26