• January 10th, 2022
• By Midsilver Investment Limited

Throughout most of the review period, the appetite for risk remained strong. However, renewed concerns about Covid-19 in late November dampened the earlier momentum. Before reports of a new, concerning virus variant surfaced, stock indices in many advanced economies (AEs) had seen significant growth. Corporate credit spreads in AEs were narrow, and record-level issuance hinted at extremely favorable financial conditions. Government bond yields rose notably at the shorter end, reflecting investor uncertainty about rising inflation and potential shifts in monetary policy. In emerging market economies (EMEs), government bond yields also went up, as a decline in their currency values against a strengthening US dollar exposed concerns regarding their economic prospects.

After a largely prosperous quarter across many markets, stock values experienced significant declines towards the end of the period. Equity prices in AEs, especially in the US, were bolstered by consistently strong actual and forecasted earnings. However, the elevated implied risk of major market corrections, as deduced from option prices, signaled continued investor apprehension. The market correction that occurred towards the period's close diminished some of the US's earlier gains and resulted in either stagnant or slightly negative performance in other markets.

The enduring risk appetite throughout the period supported robust corporate credit. Bond spreads remained among the tightest since 2010, even for lower-rated entities, though they did widen towards November's end. Issuance of investment-grade bonds remained robust, while high-yield bonds neared historical peaks. Extremely favorable credit conditions were also evident beyond public markets, especially evident in the demand for cryptoassets and private capital markets catering to smaller and nascent entities.

Yield curves in AEs witnessed an upward movement and subsequent flattening, with short-term yields experiencing a significant spike midway through the period, occasionally amidst volatile trading conditions. While AE central banks began rolling back the extraordinary support necessitated by the pandemic, their guidance for the near and medium-term remained measured. The stark contrast between this guidance and the sharp uptick in front-end yields prompted questions. Were investors divided on inflation outlooks, anticipated policy reactions, or were other elements influencing the situation, like the forced de-leveraging of positions?

Financial conditions for numerous EMEs progressively tightened. Government bond yields, particularly outside emerging Asia, saw an increase. The strengthening of the US dollar, more pronounced by the end of November, further tightened conditions and escalated inflationary pressures. This complicated monetary policy decisions, especially for nations contending with pandemic-induced issues within a restricted fiscal framework. In contrast, the stability of the Chinese renminbi was noteworthy, even as it faced growth challenges due to its real estate sector's struggles.