Volatility or Opportunity?

Dull it has not been. Rather a busy couple of weeks since our last delve into markets and the one constant has been change. With Western markets having entered and almost exited earnings season with what can only be described as fairly lofty valuations, companies appear to be more than dealing with current challenges and beating even the more optimistic of predictions. It is not just the incumbents of the S&P 500 and their global equivalents that have been delivering.

Research published this week by Bloomberg has highlighted that those recently IPO’d firms that make you squint to check you read the valuation right have been outperforming by even more. Elsewhere despite the continued theme of inflation and its stickiness, jitters in China appear to have waned, for now at least, as the world’s most indebted property developer, Evergrande, made three $-denominated coupon payments at quite literally the final hour. Risky business indeed. Anyone that has spent any time in treasury and markets knows how even the most rudimentary of processes like making a payment can go horribly wrong!

In continental Europe, markets are being told, again, that they are getting ahead of themselves. Expectation of a hike from the hugely punitive -0.50 is apparently misplaced. Given where base rates, inflation and bond pricing currently lie, the challenge is finding a currency anywhere where real rates are not negative. Unfortunately, COVID cases have once again been rising across the bloc and fresh lockdowns are not just being considered but imposed. Aside from the disruption to personal mental and physical wellbeing, as we have seen before this causes severe economic damage that can also lead to scarring.

Sterling is undoubtedly the winner when it comes to not meeting expectations. Governor Bailey, who has inherited his predecessors unfortunate nickname of the “unreliable boyfriend” has faced rather a lot of criticism for not hiking interest rates like the market wanted priced in. Memories can be short, but many of the largest and most influential central banks have made it clear that this time it is different, and thus policy must adapt to the unique circumstances we find ourselves in. What does this mean for rates? We are told that whilst stable prices remain a top priority, the labour market must also recover prior to hiking. Was this a ploy by the Bank a to help cool the property market by increasing the cost of wholesale cash and thus mortgages? Whilst many argue that raising rates too soon can be damaging, what is the price of leaving it too late?

Whilst, the market retrenched dramatically off the back of the Bank’s inaction, our products continue to benefit from the ongoing expectation of rate hikes over the coming months, unlike some of the traditional stores of cash.

The Fed came in as expected last week with a plan to taper the bond buying program which created an environment that has ensured stability, but arguably with it, a mispricing of risk. Communication with the market has been well managed as stocks did not fall off a cliff on the announcement. Not even the higher than expected (and already very high) inflation print yesterday, at 6.2% did anything to raise concerns. From a yield perspective, US treasuries remain off the recent highs, perhaps indicating that concerns around sustainable growth and thus higher rates remain a concern over the medium term. Inflation numbers like this were last seen in 1990, when interest rates were hovering around 10%, which, depending on whether you take the upper or lower band, equates to 40 times, or infinitely higher rates. The good news for those active in the cash space is that we are seeing the market begin to price hikes and can thus pass on this reward.

Central banks have held off raising interest rates for a plethora of reasons, and history will be the judge of whether this was right or wrong. The effect has been that holders of cash continue to struggle to find any return whatsoever and on a risk-adjusted basis matters often look even worse. Our unique structure allows all onboarded clients to take advantage of wholesale market dynamics where premiums are beginning to be paid to secure liquidity, rather than being beholden to deposit rates which may or may not pass on any moves in base rates if and when they do arise. One mechanism that is usually quick to adjust in a rising rate environment is the price to borrow. We don’t expect this time to be different!

Articles of Interest

Here Are Goldman’s Top Trades for 2022
Monetary Policy Report – November 2021

An FTF or Fixed-Term Fund is a regulated fund investment that offers exposure to a single investment-grade obligor for a fixed term, without the need for any client infrastructure. An FTF has many of the same characteristics as a term deposit, but can offer exposures outside of the banking sector. TreasurySpring is originating FTFs with sovereign, financial and corporate obligors.