Fed hiked the rates by 75 bps for the 3rd straight time this week pushing the key rate from 3 to 3.25 percent and further signaled no respite from rate hike given the inflation scenario. This led to steep declines in equity and front end bond valuations.
Renewed rise in inflation has added firepower to the tightening stance of the central banks. The central banks are ready for slower growth but not higher inflation anymore. Falling PMI and rising interest rates makes the equation very complex for the Fed to assure a soft landing. Furthermore, rising dollar makes EM credit holding cheaper and less valuable hence leading to big withdrawals and thus leading to even more depreciation for the EM currencies.
I would favor credit over equities now since we see underpriced credit spreads, meaning spreads are higher than they should be given the risk of default. Equities are exposed to higher vol and increasing cash flow uncertainties given the rising inflation fears.
Treasuries won't be preferred given the rising yields, which still do not reflect the investors demand for higher premium for long term yields. Furthermore, This is in part why I believe inflation linked bonds shall outperform equity, given the rising debt cost for the treasury.
Purchases of put option contracts on stocks and exchange traded funds have surged, with big money managers spending $34.3bn on the options in the four weeks to September 23. The total was the largest on record in data going back to 2009, and four times the average since the start of 2020.
In the UK, it's been a roller coaster ride when it comes to the housing market. The covid crisis increased housing demand and hence rents and prices but higher mortgage rates are acting as counter force to the high tide. Though consumer spending remains strong, weaker pound (all time low) makes things worse specially for import sensitive sectors of the economy.
In addition to the housing market froth, recent policy changes made to subsidize energy and reduce income tax will cost the government approx 60 billion pounds, which it plans to fund by issuing more gilts, making it debt loaded at a time when interest expense is increasing manifold. This led to massive sell off in the gilt market, pushing the 10 year yield to an 11 year high at 3.77%.
Yen is facing multi-decade lows because of rate differentials. That’s really it. The Bank of Japan thinks it has a chance to kill deflation for good, and so has chosen to cap Japanese 10-year yields at 25 basis points. Virtually every other global interest rate is rising. Capital flows to where rates are highest. Right now that means capital flowing away from the yen.
Interesting Charts:
Comments