The S&P 500 closed down marginally. It has ended 12 out of 17 trading sessions this year in the red, down 8.7%. But not every segment of the market is showing the same crisis.
Investors in corporate bonds have largely stood their ground. The iShares exchange-traded fund that tracks investment grade corporate bonds, which go by the ticker “LQD,” has dropped just 4% this year. The SPDR and a similar fund from Bloomberg that tracks bonds with low credit ratings (“JNK”) are down just 2.5%.
“There’s a lot of moratorium on corporates right now,” Matthew Cairns, head of credit strategy at Rabobank, told me.
What explains the discrepancy? It comes down to the fact that companies still have a lot of cash in their hands, and are expected to continue mining healthy profits even as the Fed engineers policy changes.
“Corporate balance sheets are in excellent condition. We have had a decade of very easy money, which has provided an incredible level of support,” Cairns said. “It has provided a huge buffer for them.”
Watch this space: One thing that could shock corporate bond markets is if the Fed decides to raise interest rates to fight inflation and sharply shrink its balance sheets. Antoine Bouvet, senior rate strategist at ING, told me.
Should the Fed begin unloading trillions of dollars in assets purchased since the start of the pandemic, that could send shockwaves through the system.
However, there is no indication yet that the Fed will do so. Powell said Wednesday that the Fed sees interest rate hikes as “the primary means of adjusting monetary policy” and balance sheet cuts as part of the process of raising interest rates “in a predictable manner over time”. will be”. It has just started.
And as the Fed begins to reduce its holdings, the size of its balance sheet will remain “huge,” according to Cairns, to boost investor confidence.
“We are not going back to normalcy,” he said.
US economy likely to remain strong by the end of 2021
The Omicron edition puts new pressure on America’s recovery at the end of 2021. But the economy may have remained strong.
That would be a sizable increase from the 2.3% annualized growth rate reported in the third quarter, when the delta version weighed on the economy. But the future looks bleak, reports my CNN business associate Anneken Tappe.
Anita Markoska, chief economist at Jefferies, told Anneken that the bank has set a growth rate of just 1.5% for the first three months of 2022.
On the radar: The International Monetary Fund this week slashed its global growth forecast for 2022 by half a percentage point to 4.4%. This was due to a major recession for the US economy.
The IMF is looking at a 4% increase in US economic output this year after a 5.6% increase in 2021. It shaved 1.2 percentage points from its previous forecast because of “low chances” that Congress will pass President Joe Biden’s build back better economic plan. , the supply chain. The growing potential for disruption and aggressive action by the Federal Reserve to rein in inflation.
This financial weapon may be what Russia fears most
Some are calling it the “nuclear option”.
As Western governments threaten Russia with a package of unprecedented sanctions aimed at preventing President Vladimir Putin from ordering an invasion of Ukraine, a measure in particular strikes fear in the heart of the Kremlin: the country’s global banking system. separation from the system.
What is Swift? The Society for Worldwide Interbank Financial Telecommunication was founded in 1973 and is now used by over 11,000 financial institutions to send secure messaging and payment orders. Not being a globally accepted option, it is an essential pipeline for global finance.
Removing Russia from SWIFT would make it nearly impossible for financial institutions to send money into or out of the country, causing a sudden blow to Russian companies and their foreign customers – particularly buyers of oil and gas exports denominated in US dollars.
Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs, wrote in a paper last year for the Carnegie Moscow Center, “The cutoff would eliminate all international transactions, trigger currency volatility and cause massive capital outflows.” ” ,
may it be? is an example. SWIFT unplugged Iranian banks after the European Union banned the country’s nuclear program in 2012. According to Shagina, Iran lost almost half of its oil export revenue and 30% of foreign trade after the disconnection.
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Also today: The first look at US GDP for the last three months of 2021 comes at 8:30 a.m. with early jobless claims from last week.