The Cambridge Weekly – 11 April 2022

Q2 begins with QT top of the agenda

Are we entering a period of global equity market consolidation? The chart below shows global equity and UK equity total return indices from the onset of the pandemic to now. In aggregate, global markets have managed a decent enough bounce since the onset of Vladimir Putin’s invasion of Ukraine. Indeed, the awfulness of the news from the area has ceased to impact markets greatly. We have returned to worrying about the resurgence of COVID-19 in China, along with its impacts on the global supply chain and on overall global growth and worrying about the US Federal Reserve (Fed) and its plans for tightening US monetary policy.

Behind the Curve

You may have heard about the shape of the US yield curve over the last couple of weeks. This is nothing more than a plot of the fixed term yields on government bonds at different maturities, and yet it is probably one of the most viewed graphs in the financial industry. In the past, an inversion of the curve – where shortterm bond yields go above long-term yields – has been an astoundingly accurate predictor of economic downturns. Recently, the yield on ten-year US Treasuries sunk lower than the yield on two-year coupons. Every time that has happened in the post-war period, a recession occurred in the next 15-24 months.

Enigmatic emerging markets give investors plenty to think about

After a sharp recovery last month, Russia’s rouble is no longer the world’s worst performing currency this year. Far from it, in fact, having erased virtually all of the losses sustained since the invasion of Ukraine. The ‘worst in class’ moniker now goes to the Sri Lankan rupee, which has sunk an incredible 32% since the start of the year. Most astonishingly, the collapse has come entirely in the last month, after more than a year of stability in exchange markets.