PMC Global Macro Team: A Look At The Latest Trends You Should Be Tracking
Envestnet | PMC provides independent advisors, broker-dealers, and institutional investors with comprehensive manager research, portfolio consulting, and portfolio management to help improve client outcomes. Every month our Global Macro Team offers insights into the themes currently shaping the markets to help you quickly take note of recent trends that your clients may be inquiring about.
Risky assets take a hit
Last year risky assets garnered a lot of attention. Tailwinds from an increase in stimulus by the Fed drove “meme stocks”, cryptocurrencies, and Spacs to all-time highs. This speculation was probably best exemplified by GameStop, a downtrodden company that saw a meteoric rise. Flash forward one year and these riskier assets have been pummeled as the Fed took a more hawkish stance. The average stock in the Russell 3000 and in the Nasdaq composite is down about 35 percent and 45 percent, respectively.1 Clearly the specter of rising rates looms large over more risky areas in the market.
Russia-Ukraine standoff: Geopolitics back in focus
The ongoing military build-up in Russia and Ukraine border and the associated political rhetoric has put the focus on geopolitical risks. While the standoff has resulted in a sharp correction in Ruble and Russian equities, any escalation can have an adverse impact on global risk assets too. As Russia is one of the largest producers of oil, and Europe being very much dependent on Russian natural gas, an escalation of conflict can result in potential supply disruptions, which can propel energy prices further.2 This may compound the current inflation worries and cause unwanted gyrations in global markets.
Ukraine is also known as the ‘breadbasket of Europe’ and most of the growing areas and ports are closer to disputed territory. It is expected to be the third largest exporter of corn in the 2021-22 season. Moreover, around 29 percent of global wheat export is coming from Ukraine and Russia. Hence, any disruption in shipments from the ports around Black Sea is expected to fuel global food inflation further.3,4
As the world grapples with inflation, higher rates, and a virus, escalation of geopolitical risks, both in terms of armed conflicts or extreme sanctions, can throw a wrench into the global growth and inflation expectations.5
Deal of the year: Microsoft to acquire Activision Blizzard for $69 billion
On January 18, Microsoft announced that it has reached agreement with Activision Blizzard, a leading video game developer, to acquire the latter for $95 a share/$69 billion in cash. Federal Trade Commission (FTC), led by its new Chairwoman Lina Khan, will review the deal for antitrust approval. While the year is still young and its $69 billion price tag is by no means record-breaking, if completed and approved, it would be the deal of 2022 as the deal has far-reaching implications on merger and acquisition (M&A) for years to come.
Under normal circumstances, this would be a done deal. Shareholders of both companies overwhelmingly support the deal and there should be little monopoly threat. Gaming is still a quite fragmented industry, and this is very much a vertical integration deal (Microsoft being the distributor while Activision Blizzard being the developer). There are a number of fast-growing and larger competitors in the gaming industry such as Tencent, Sony and Apple than the combined company. However, antitrust decisions by government regarding M&A in recent years have been anything but normal.6 Approved or not, this deal will force the government to clarify the rule and restore the order in its antitrust decision-making process.
Tight labor markets are impacting corporate hiring
As America’s labor pool gets increasingly shallow, a recent survey cited worker shortages as the greatest threat to business in 2022. This has prompted companies to get creative with how they attract and retain talent, ranging from changing business models, buying robots to pack boxes, revamping recruitment and training programs, and even accepting online certifications in lieu of four-year college degrees. Pay and other non-wage compensation continues to be a key incentive, although data shows that this increase has been drastically different across income-groups and a contributor to increasing inequality.7,8
Inflation, yields, and spreads rise while fixed income returns head south
After topping out at 10.0 percent in October 2009, it took until January 2018 for the United States’ unemployment rate to finally hit 4.0 percent. By contrast, after COVID-19 caused the unemployment rate to skyrocket to 14.7 percent in April 2020, it took less than two years to drop to 3.9 percent in December 2021.9 In addition to the rapid decline in unemployment, 2021 also saw 5.5 percent real economic growth and a 4.5 percent increase in civilian wages and salaries.10,11 The unprecedentedly rapid development and deployment of vaccines domestically, as well as overwhelming fiscal and monetary stimulus, made this lightning recovery possible, but the persistence of SARS-CoV-2 variants, a shift in consumption habits, and resultant supply chain snarls have all combined to drive prices sharply higher and wipe the luster off the U.S. rebound for many of its beneficiaries, including the fixed income market that rallied on falling rates.
The Consumer Price Index spiked to 7.0 percent year-over-year in December, the fastest rate in four decades, while the Federal Reserve’s preferred metric, the Personal Consumption Expenditures Index rose 5.8 percent during the same period.12,13 These moves eroded the value of wage gains and put pressure on the Fed to ramp down its bond buying program, accelerate the timeline for shrinking its balance sheet, and raise the fed funds rate to tamp down on price increases. Consequently, short- and intermediate-term Treasury yields rose significantly in January 2022 and outpaced increases in long bond yields, leading to a flattening curve as the normalization of monetary and fiscal stimulus weighed on growth expectations.14
With the Fed having shifted to this more hawkish stance – fed funds futures markets are pricing in four or five hikes in 2022 – risky assets suffered in January; the S&P 500 Index fell 5.2 percent and the Bloomberg US High Yield Corporate Index fell 2.7 percent as the index’s option-adjusted spread widened 59 basis points (bps), according to Bloomberg Indices data. While the spread on the Bloomberg US Investment Grade Corporate Bond Index only widened 14 bps, its 8.4-year effective duration (versus 4.1 years for high yield), dragged returns down even further than high yield, with the index returning -3.4 percent during the month. Outside of 3-month T-Bills, the only segment of the fixed income market that posted positive results for January was bank loans, given their floating base rate; the S&P/LSTA Leveraged Loan Index returned 36 basis points.15,16,17
1. Eric Platt, Nicholas Megaw, and Josh Oliver, “Darker market mood sets in, one year after GameStop frenzy.” Financial Times, January 28, 2022, https://www.ft.com/content/2e8fc97c-1e4f-41f4-9b44-109933384308
2. Myra P. Saefong and William Watts, “Oil rallies as analyst warns Ukraine crisis could be a ‘seismic event’ for the energy market,” MarketWatch, January 14, 2022, https://www.marketwatch.com/story/oil-heads-for-fourth-straight-weekly-gain-11642167946
3. “How a Russian-Ukraine conflict might hit global markets,” Reuters, January 21, 2022, https://www.reuters.com/markets/europe/how-russian-ukraine-conflict-might-hit-global-markets-2022-01-21/
4. Will Horner and Kirk Maltais, “Russia-Ukraine Tensions Drive Global Wheat Prices Higher,” The Wall Street Journal, January 31, 2022, https://www.wsj.com/articles/russia-ukraine-tensions-drive-global-wheat-prices-higher-11643630790
5. Justin Leverenz, Linda Sun-Mattison, and Alex Conrad, “The Russian standoff: Global equities could feel the effect if devastating sanctions take hold,” Invesco, January 24, 2022, https://www.invesco.com/us/en/insights/russian-standoff-global-equities-could-feel-effect-if-devastating-sanctions-take-hold.html
6. Stefania Palma, James Fontanella-Khan, Javier Espinoza, and Richard Waters, “‘Too big to be ignored’: Microsoft-Activision deal tests regulators,” Financial Times, January 20, 2022, https://www.ft.com/content/f30452bd-bf13-4841-8038-264a83c9295d
7. “America’s labour shortages have done little to boost perks for workers,” The Economist, January 22, 2022, https://www.economist.com/finance-and-economics/2022/01/22/americas-labour-shortages-have-done-little-to-boost-perks-for-workers
8. “How America’s talent wars are reshaping business,” The Economist, February 5, 2022, https://www.economist.com/business/2022/02/05/how-americas-talent-wars-are-reshaping-business
9. U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, February 3, 2022.
10. U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, February 3, 2022.
11. U.S. Bureau of Labor Statistics, Employment Cost Index: Wages and salaries for All Civilian workers in All industries and occupations [CIS1020000000000I], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CIS1020000000000I, February 3, 2022.
12. U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCSL, February 3, 2022.
13. U.S. Bureau of Economic Analysis, Personal Consumption Expenditures: Chain-type Price Index [PCEPI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCEPI, February 3, 2022.
14. Jeanna Smialek and Ana Swanson, “Consumer prices popped again in December, casting a shadow over the economy.” The New York Times, January 12, 2022, https://www.nytimes.com/2022/01/12/business/economy/cpi-inflation-december-2021.html
15. Jeanna Smialek and Ben Casselman, “Inflation Continued to Run Hot and Consumer Spending Fell in December,” The New York Times, January 28, 2022, https://www.nytimes.com/2022/01/28/business/pce-inflation-federal-reserve.html
16. Colby Smith and Kate Duguid, “Fed’s Jay Powell refuses to rule out string of aggressive rate rises,” Financial Times, January 26, 2022, https://www.ft.com/content/0f195295-7ff2-4d0c-b5ce-43aa5a4b1223
17. Erik Norland, “Fed Rate Hikes: Expectations and Reality,” CME Group, February 2, 2022, https://www.cmegroup.com/insights/economic-research/2022/fed-rate-hikes-expectations-and-reality.html
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