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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.

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Featured Insights

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.

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.

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.

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.

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.

May 2022

Under Pressure

Global equity markets came under pressure for yet another month as markets priced in tightening of policy and slowing growth with increased stagflation risks.
Forward-looking indicators of growth have slowed, including measures of consumer confidence, but hard activity data still show muted spillovers from the conflict to date.
Inflation, on the other hand, continued to rise or remained very elevated. China, with the ongoing pursuit of zero Covid via severe lockdowns and the shakeout in the property sector, continues to constitute a risk to the global economy.
Both global equities and US equities saw a fourth straight week of outflows and this outflow streak is the longest since the pandemic in 2020.
Overall, global markets were down by -8.0%. S&P 500 (-8.7%) and Nasdaq (-13.2%) came under pressure as the markets priced in a front-loaded tightening of policy by the Fed and resulting upward movement in real yields. Tech, financials and REITs saw the biggest outflows.
We continue to believe that income equities (i.e., equities of companies that return cash to shareholders either through dividends or share buybacks) will likely outperform non-income paying stocks as income provides a hedge for upside inflation surprises and implies a lower sensitivity to higher rates.
The USD continued to attract safe haven flows and contributed to tightening of financial conditions.
Long duration bonds lost the most, as the US 10-year yield increased by 60 bp and the UK 10-year Gilt yields were up by 30 bp. Both IG and HY credit spreads widened.

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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.

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.

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.

China Juggles Growth, Reform & Geopolitics

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

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.

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.

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.

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.