Delayed reaction, liquidity contraction

Delayed reaction, liquidity contraction

lewthwaite-brett

Brett Lewthwaite

  • Senior Managing Director, Deputy Head of Credit
  • Read bio

The Macquarie Fixed Income Strategic Forum

One of the challenges with investment management is balancing the short term noise of financial markets with a longer term assessment of the investment and economic landscape. The Macquarie Fixed Income Strategic Forum is held three times a year, comprising over 130 investment professionals, and operates to establish our medium term views and strategic portfolio positions.

Key takeaways from the the latest forum

Delayed reaction

Delayed reaction

Inflation is slowing across the globe and central banks have been slowing down the magnitude of the rate hikes. However, the significant tightening of monetary policy in 2022 has yet to reveal its impact on the economy and markets...mind the lags.

Inflation, it's so last year

Inflation, it's so last year

Inflation has peaked with supply recovering while demand has cooled amid the most aggressive monetary policy tightening in decades.

The most anticipated recession​

The most anticipated recession​

The global economy heads into the highly anticipated recession in a stronger position than past cycles (resilient balance sheets and savings), hence it could be a cyclical shallow recession. However, there are more downside risks as the effects of the significant tightening have yet to be felt. Consensus is expecting a recession this year, but the real question is whether it will be a soft or hard landing for financial markets.

Liquidity contraction​

Liquidity contraction​

We had a very long period of quantitative easing (QE), with ample liquidity and significantly low interest rates and cost of capital, which supported asset prices. We are currently in the opposite environment of quantitative tightening (QT), high levels of interest rates and cost of capital, but asset prices have not readjusted lower. Because of this, we are mindful of a liquidity contraction.


[2708750]

IMPORTANT RISK CONSIDERATIONS

The views expressed represent the investment team’s assessment of the market environment as of February 2023, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice.

Nothing in this market commentary shall be construed as a solicitation to buy or sell any security or other product, or to engage in or refrain from engaging in any transaction. Macquarie conducts a global full-service, integrated investment banking, asset management, and brokerage business. Macquarie may do, and seek to do, business with any of the companies covered in this market commentary. Macquarie has investment banking and other business relationships with a significant number of companies, which may include companies that are discussed in this commentary, and may have positions in financial instruments or other financial interests in the subject matter of this market commentary. As a result, investors should be aware that Macquarie may have a conflict of interest that could affect the objectivity of this market commentary. In preparing this market commentary, we did not take into account the investment objectives, financial situation, or needs of any particular client. You should not make an investment decision on the basis of this market commentary. Before making an investment decision you need to consider, with or without the assistance of an adviser, whether the investment is appropriate in light of your particular investment needs, objectives, and financial circumstances.

Macquarie salespeople, traders and other professionals may provide oral or written market commentary, analysis, trading strategies or research products to Macquarie’s clients that reflect opinions which are different from or contrary to the opinions expressed in this market commentary. Macquarie’s asset management business (including MAM), principal trading desks and investing businesses may make investment decisions that are inconsistent with the views expressed in this commentary. There are risks involved in investing. The price of securities and other financial products can and does fluctuate, and an individual security or financial product may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international or local financial, market, economic, tax or regulatory conditions, which may adversely affect the value of the investment. This market commentary is based on information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in this market commentary. Opinions, information, and data in this market commentary are as of the date indicated on the cover and subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this market commentary and/or further communication in relation to this market commentary. Some of the data in this market commentary may be sourced from information and materials published by government or industry bodies or agencies, however this market commentary is neither endorsed or certified by any such bodies or agencies. This market commentary does not constitute legal, tax accounting or investment advice. Recipients should independently evaluate any specific investment in consultation with their legal, tax, accounting, and investment advisors. Past performance is not indicative of future results.

This market commentary may include forward-looking statements, forecasts, estimates, projections, opinions, and investment theses, which may be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “can,” “plan,” “will,” “would,” “should,” “seek,” “project,” “continue,” “target,” and similar expressions. No representation is made or will be made that any forward-looking statements will be achieved or will prove to be correct or that any assumptions on which such statements may be based are reasonable. A number of factors could cause actual future results and operations to vary materially and adversely from the forward-looking statements. Qualitative statements regarding political, regulatory, market and economic environments and opportunities are based on the author’s opinion, belief, and judgment.

Diversification may not protect against market risk.

Market risk is the risk that all or a majority of the securities in a certain market – like the stock market or bond market – will decline in value because of factors such as adverse political or economic conditions, future expectations, investor confidence, or heavy institutional selling.

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.

Liquidity risk is the possibility that securities cannot be readily sold within seven days at approximately the price at which a fund has valued them.

Quantitative easing (QE) is a form of monetary policy in which a central bank, like the US Federal Reserve, purchases securities from the open market to reduce interest rates and increase the money supply.

Quantitative tightening (QT) refers to when central banks raise the federal funds rate. In a tightening monetary policy environment, a reduction in the money supply is a factor that can significantly help to slow or keep the domestic currency from inflation.

Recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in gross domestic product (GDP) in two successive quarters.

All third-party marks cited are the property of their respective owners.

Economic trend information is sourced from Bloomberg unless otherwise noted.

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.