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The Cambridge Weekly – 31 January 2022

Taper Tantrum 2.0 fears rattle markets

The unnerving start to the year escalated last week, with many lay observers attributing market volatility to the rising possibility of war between Russia and Ukraine. But, as outlined in the video market update we posted last Wednesday, while political tensions are not helping markets (nor energy prices), the heart of the market rout lays with the re-emerging determination of central banks to fight inflation through monetary tightening. Markets are concerned central bankers, namely the US Federal Reserve (Fed) have veered from downplaying the inflation threat to overreacting, particularly now, when the economic temperature is coming back down on its own (more about this later).

 

Hawkish Fed hovers over markets

Thanks in no small part to the Fed, last week was another wild ride in capital markets. Monday was panicky, amid global liquidity fears, increased geopolitical risks and slowing global growth – forcing a sharp sell-off in US stocks and then a strong recovery before the closing bell. Market volatility continued over the following days, culminating in a dramatic drop on Wednesday afternoon, after Jay Powell used the Fed’s post-meeting press conference to broadcast his most hawkish message in years.

 

China: is looser policy more than just window dressing?

Lenders to the ailing Evergrande Group are understandably eager to hear how the property developer plans to get out of its current mess. They will have to wait a little longer, though. Behind the scenes, restructuring has been going on since before Evergrande’s slow motion default at the end of last year – but investors have been kept in the dark. Light was supposed to be shed last week in a call with bondholders. Instead, creditors got 25 minutes of prepared answers and a “please bear with us”. Evergrande, the world’s most indebted property developer, said it hopes to have a preliminary restructuring proposal ready in six months.

 

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