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    Market review and outlook

    Market review and outlook

    Key market movements

    Uncertainty prevailed in Q1, with the Russian invasion of Ukraine causing commodity prices to spike higher. The Fed shifted to a considerably more hawkish position, and the expectation of both higher inflation and higher interest rates resulted in a sharp upward move in yields.

    US Treasuries recorded a significant negative return, with longer-duration issues underperforming on a total return basis.

    US equity markets declined, with the S&P 500 Index down 4.6%.

    The US dollar, as measured by the dollar index, appreciated over the quarter.

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    The consensus forecast for global inflation in 2022 increased by 1.2% over the quarter, causing central banks to accelerate their tightening cycles and resulting in a decline in forecasts for global growth for both 2022 and 2023.

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    Insight Investment, Economic forecast

    +3.5%

    US real growth forecast for 20221

    -0.4%

    Revision to 2022 US growth forecast1

    +6.2%

    US inflation forecast for 20221

    +1.8%

    upward revision to US inflation forecast in Q11

    Learn more about key market movements

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    European investors to be allowed easier access to US markets

    The European Union (EU) plans to widen access for US exchanges and clearing houses, which will allow EU-domiciled investors to clear US products such as mortgage-backed securities. The European Securities and Markets Authority will work to overcome any technical obstacles.

    Click here to read more.

    A surge in tax receipts is resulting in a significant decline in borrowing needs

    At its February 2022 presentation, the US Treasury Borrowing Advisory Committee estimated that tax receipts in Q1 of the 2022 financial year totaled $1.05 trillion (+31%). Total outlays were $1.43 trillion (+6%) over the same period.

    The rebound in economic activity is resulting in a significant increase in tax receipts, reducing borrowing needs. 

    Click here to read more.

    From a cost of capital perspective, BBB has become the rating sweet spot

    We believe it makes sense for corporate capital structures to increasingly skew toward debt over equity (i.e. higher leverage). The weighted average cost of capital (WACC) associated with a BBB rating has gone from the most expensive to the cheapest, if there is no associated credit distress.

    Click here to read more.

    Market outlook
    A less certain world sees value return to credit markets

    Although tensions at the border between Russia and Ukraine had been building for some time, the decision by President Putin to launch a full-scale invasion of Ukraine took many investors by surprise. In terms of global economic footprint, Russia and Ukraine are relatively small22, with Russia becoming isolated since the annexation of Crimea in 2014. However, although small economically, the two countries have far larger roles in global commodity markets, notably in the energy and agricultural sectors.

    The conflict caused the prices of several key commodities surge, sending an inflationary pulse around the world. Uncertainty around the longer-term consequences of the conflict, combined with a significantly more hawkish Fed, caused Treasury yields to rise and credit spreads to widen. The yield of the Bloomberg US Aggregate Index has almost doubled in a short period, returning some value to credit markets.

    Key market risks

    With the FOMC trying to re-establish their credibility, markets are pricing in one of the most aggressive tightening cycles in recent history. This could destabalize the recovery, tipping the economy into recession. The inversion of the yield curve may already reflect market concerns about the medium-term economic outlook.

    Please see our full report to read all our key market insights.

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    Tensions between Russia and the West have reached levels not seen since the Cold War, and the risk of an extreme event is growing. This could take the form of a chemical or nuclear attack on Ukraine, a coup in Russia or a direct conflict between Russian and Nato forces. There is also a risk that other countries such as China or India get drawn into the conflict and/or Western sanctions.

    Please see our white paper to read all our key market insights.

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    Corporate leverage has already increased over recent years as a result of M&A activity and share buybacks, but a desire to maintain investment grade status has constrained this to a degree. In an environment where abundant demand makes corporate treasurers and investors believe that credit ratings are no longer so important, it could lead to a further rise in leverage and orresponding downward shift in credit ratings.

    Please see our white paper to read all our key market insights.

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