It wasn't the best start to Jerome Powell’s first day as Fed Chair yesterday as US equity markets witnessed a sea of red, with US majors broadly closing in negative territory year-to-date. In fact, as we write, global stock markets have continued in the same vein, in a downward spiral and futures have also sold-off, which has seen a number of market players discussing the idea of the next financial crisis.
It could just be a coincidence that the equity market crash began on Powell’s first day, however, there has been a theme in the past: Yellen’s first day saw a 0.9% fall in the S&P 500, Bernanke’s initial day as Chair ended with a 2.2% fall in the index and back in 1987, the stock market sold-off ~35% over the two months following Alan Greenspan’s swearing-in ceremony.
We have previously mentioned that Powell appears to agree with Yellen’s ‘gradual’ approach to rate hikes, and yesterday he reiterated the Fed’s plans for a gradual retreat. It will therefore be interesting to see how he will navigate through the current climate, where following the stronger-than-expected that year-on-year wage increase release, which led to expectations for a pick-up in inflation, has seen market players (currently) assume a quicker approach to rate hikes. But, the US labour market has been ‘strong’ for some time now and with close to full employment we do not expect further material upward pressure to wage increases. At the time of writing, Bloomberg is pricing a 83.5% chance of a rate hike in March, and the futures market is looking for 2.5-3 rate increases this year.
In the meantime, global bond markets have broadly rallied. In terms of portfolio performance so far this month, commodity names such as Codelo, which incidentally were amongst the best performers last year, have come under some pressure; alongside the broader fall in commodities. Meanwhile, holdings in high-grade Chinese quasi-sovereigns have remained resilient; in fact, these holdings by nature have always held up well through volatile market episodes. At this juncture we do not see anything drastic to do across our strategies, as we remain comfortable with our highly-rated, A3 portfolios which offer in excess of three notches (weighted average) credit cushion.