The S&P 500 ended slightly lower. It has ended 12 of 17 trading sessions this year in the red, losing 8.7%. But not all parts of the market are showing as much distress.
Investors in corporate bonds largely resisted. The iShares exchange-traded fund that tracks investment-grade corporate bonds, which bears the symbol “LQD”, has fallen just 4% this year. A similar fund from SPDR and Bloomberg that tracks bonds with lower credit ratings (“JNK”) is only 2.5% lower.
“Businesses have been held in check at this point,” Matthew Cairns, head of credit strategy at Rabobank, told me.
What explains the discrepancy? It boils down to the fact that companies still have tons of cash on hand and should continue to generate healthy profits even if the Fed engineer a policy change.
“Corporate balance sheets are in excellent shape. We’ve had the best part of a decade of very easy money, which has provided an incredible level of support,” Cairns said. “It gave them a huge buffer.”
Watch this space: One thing that could rattle corporate bond markets would be if the Fed decides interest rate hikes aren’t enough to fight inflation and quickly shrinks its balance sheet, I’m told. says Antoine Bouvet, Senior Rates Strategist at ING.
If the Fed started unloading slices of the trillions of dollars in assets it has purchased since the start of the pandemic, it could send shockwaves through the system.
So far, however, there is no indication that the Fed will. Powell said on Wednesday that the Fed sees interest rate hikes as the “primary way to adjust monetary policy” and that balance sheet reductions “won’t happen over time in a predictable way” until after the launch. the process of raising interest rates.
And even when the Fed begins to reduce its holdings, the size of its balance sheet will remain “huge”, boosting investor confidence, according to Cairns.
“We are not going back to normal,” he said.
The US economy jumped at the end of 2021
U.S. gross domestic product — the broadest measure of economic activity — rose 5.7% last year, the fastest pace since 1984 when Ronald Reagan was in the White House, the Bureau reported Thursday. of Economic Analysis.
The last three months of 2021 got a much better scorecard than economists had expected: GDP grew at an annualized rate of 6.9%.
This is a substantial uptick from the delta-paced third quarter, when GDP grew at an annualized rate of just 2.3%. In fact, it’s the best quarterly performance since the third quarter of 2020, when the initial reopening boom boosted economic growth.
On the radar: The International Monetary Fund this week cut its global growth forecast for 2022 by half a percentage point to 4.4%. This was partly because of a sharp deterioration in the US economy.
The IMF sees U.S. economic output rising 4% this year after rising 5.6% in 2021. It cut its previous forecast by 1.2 percentage points due to a “weaker outlook” that Congress adopts the President Joe Biden’s Build Back Better economic plan, lingering supply chain disruptions and the growing likelihood of aggressive action by the Federal Reserve to contain inflation.
This financial weapon could be what Russia fears most
Some call it “the nuclear option”.
As Western governments threaten Russia with an unprecedented set of sanctions aimed at deterring President Vladimir Putin from ordering an invasion of Ukraine, one measure in particular seems to strike fear into the hearts of the Kremlin: cutting the country off from global banking system. .
What is SWIFT? The Society for Worldwide Interbank Financial Telecommunication was founded in 1973 and today is used by more than 11,000 financial institutions to send secure messages and payment orders. With no globally accepted alternative, this is essential plumbing for global finance.
Russia’s withdrawal from SWIFT would make it almost impossible for financial institutions to send money to or from the country, causing a sudden shock to Russian businesses and their foreign customers, especially buyers of oil exports and gas denominated in US dollars.
“The cut would end all international transactions, trigger currency volatility and cause massive capital outflows,” wrote Maria Shagina, a visiting fellow at the Finnish Institute of International Affairs, in an article last year for the Carnegie Moscow Center.
Could this happen? There is a precedent. SWIFT unplugged Iranian banks in 2012 after they were sanctioned by the European Union for the country’s nuclear program. Iran lost almost half of its oil export revenue and 30% of its foreign trade as a result of the disconnection, according to Shagina.
Also today: The first look at US GDP for the last three months of 2021 arrives at 8:30 a.m. ET, along with the first jobless claims for the past week.