Risk assets have largely been driven by a unifying theme for most of the year, namely a prolonged AI Capex boom measured in the trillions of dollars, underpinned by accommodative monetary policy and stimulative fiscal policy. At the same time, lingering inflationary pressures, geopolitical conflicts and a darkening political picture have been simmering through the summer, something is likely to give.

It was more of the same in July as markets continued to navigate the crosscurrents of interest rates, geopolitics, and the ongoing tech/AI capex extravaganza. All three factors contributed at various times, but it would be a fair summary to say that there was a theme of rotation out of tech towards financials and other sectors while a “Hawkish hold” Fed and on-again-off-again Iran war peace talks led to intramonth volatility.

Given the dominant role central banks play in the global financial system it should be expected that we should devote a disproportionate amount of time analyzing their actions. Notably, in June, the ECB raised rates for the first time in three years, and we’ve had a leadership transition at the Fed amidst much fretting about compromised independence.

“The Holy Roman Empire is neither Holy, nor Roman, nor an Empire.”  Voltaire And so to May, a new month with the same old concerns about interest rates and their impact on asset prices, with [...]

Like the publican watching the freshly poured pint of Guinness settle, the markets wait. They wait for peace or a renewal of hostilities; an inflationary spiral or economic decline; higher rates, or lower rates. For their part central banks showed that are waiting too. With a flourish they bequeathed us the “hawkish hold”; a coordinated recognition of the delicate situation they are in.

As expected, the military action that began at the end of last month escalated into a full-blown conflict in March and unsurprisingly dominated both news flow and markets. Volatility surged along with oil prices and interest rates, driven by oil supply concern and heightened inflationary expectations.

Is Blue Owl a Yellow Canary? News that the large private credit provider is in some financial stress triggered a sell off, including in bank assets, and prompted regulators to announce a review of similar exposures among regulated entities.

In the summer of 1989, markets were basking in the seventh year of a post-recession boom. But as is often the case during the late-stage of growth, world markets were also riddled with excesses.

It is a well-known fact among market history nerds that stock performance (SPX index) in years ending in ‘5’ is always positive, especially in the even decades, where the ‘5’ marks the first year of a presidential administration.

As the end of the year beckons, we choose not to dwell on recent events – which have remained static talking points for months while underlying fundamentals remain cloaked in uncertainty – and instead, focus on likely outturns for the upcoming year. 

October provided no major surprises, although for the first time market concerns over elevated tech valuations manifested themselves in a broad selloff. 

And so, just like that the first three quarters of the year are done, and by all measures it’s been a solid year thus far for risk markets. European financials have been outperforming, finally reaping the benefits of a decade-long restructuring and a normalized interest rate environment after the disastrous excesses of Monetary Theory-induced money printing.

There was an absence of fireworks last month despite several smouldering macroeconomic and geopolitical situations.  The relative calm owes more to the fact that it was August, rather than any sense of confidence in current leadership to resolve these outstanding problems. 

The mix of politics and finance makes a terrible cocktail and recently we’ve witnessed the consequences of uneconomic decisions unravelling because of a changed political or economic environment or simple customer disinterest in certain products.

One long-running theme in European financial circles has been consolidation of the banking sector.  It’s something we’ve written about extensively over the years and recently it returned to the spotlight as the sector has returned to health. 

With no fresh calamities markets were forced to deal with the increasing banality of the current economic reality, which means growing concerns over deteriorating public finances on both sides of the Atlantic.  With good reason, as politicians of all stripes are proving the old adage that no government ever voluntarily shrinks in size, or meaningfully fund new spending. 

Chaos reigned in April, as a torrent of new tariffs, retaliatory tariffs and amended tariffs complicated by accelerations, delays and cancellations, upended markets that were already reeling in expectation of what was about to be announced.  Not since the days of Senator Smoot and Representative Hawley have tariffs been the cause of such disruption.

Memories of German reunification were rekindled in March, as an announced suspension of debt limits and talk of large deficit spending fueled the largest selloff in Bunds since 1990. 

Recently, there has been considerable discussion on both sides of the Atlantic about the need to review financial oversight and regulation.  This is a good thing, since the major reforms enacted in the febrile atmosphere of the post Global Financial Crisis (GFC) era were nothing if not a paean to the old adage that “good politics makes bad policy”.

The new year began just as the old one ended, with European leaders seemingly flummoxed to deal with the myriad of problems their policies have exacerbated while watching a bonfire of regulations (and government by legislation) across the Atlantic. 

A challenging month for the governments of the large European states as a combination of deteriorating economies, concern over finances and weak leadership upset markets in the run up to year end. 

After years of waiting and prognostications of doom, the US presidential election came and went, and the next day, against all odds, the sun still managed to rise in the East. Almost immediately markets moved to extrapolate the impact of potential policy choices, and equities rallied strongly while Treasury yields rose 15 bp, reflecting the consensus view that a pro-growth/fiscally loose approach will prevail in the new administration.

October was the Month of Tax as a number of countries introduced or mooted an increased take from their citizens. While the UK took centre stage with the long-awaited budget from the new Labour government, France raised the prospect of new taxes on corporations and high-net-worth (HNW) individuals while the Italian government approved plans to raise € 3.5 billion from banks and insurance companies in yet another windfall tax.

After a relatively quiet summer, September was an action-packed month for both news and markets, more of which later, but we start on the subject of Europe, and a report on economic competitiveness by Mario Draghi which was released early in the month. 

If we do indeed enter a period of definitively slower/negative economic growth, then we can look back to August as the moment when the notion first entered the market’s collective consciousness. 

The political world continued to provide non-stop action in July with an expected result in the UK but a surprise in France, where the winning parties were flipped (from right to left) but with the same gridlocked end-state. 

In a year which will see the highest number of humans in history cast ballots, June markets were impacted by unexpected election announcements in France and the UK, while the US presidential race got going in earnest with an unusually early debate, despite the fact the two candidates have not yet been formally nominated by their parties. 

The level of sovereign indebtedness has been rising steadily since the Global Financial Crisis, almost regardless of political affiliation of the party in charge or economic conditions.  To be sure, the lockdown-induced recession saw a significant jump in debt levels, but in the grand scheme it has been a minor contributor to the total increase. 

The flightpath to a soft landing hit a rough patch in April, as strong economic data (inflation, employment) put paid to any notions of imminent Fed rate cuts and led to a correction in markets.  The continued stickiness of inflation prompted Chairman Powell to roll back on his “Pivot” speech and led some economists to predict a hike as the next Fed move. 

It certainly was salad days for markets in March, as the prospect of a soft economic landing, the boundless potential for A.I., and relative calm in an otherwise rancorous political environment trumped the deteriorating fiscal situations of most governments and the grinding halt to the decline of inflation. 

Once upon a time central bankers prized discretion over transparency and didn’t produce such thing as Dot Plots and public forecasts of the direction of interest rates over the next two years.  To be sure, Mr Greenspan himself succumbed to the Too-Much-Information fad in his last tightening cycle as Fed Chairman, raising rates gradually and with full transparency, perhaps contributing to the excessive market leverage pre-2007. 

What was true for depression-era bank robber-cum-folk hero Willy Sutton, remains true for hard-pressed governments looking to plug budgetary holes.  After sustaining crisis era losses and redress, European banks suffered ten lean years of excess liquidity and artificially compressed interest margins as they restructured and recapitalized, keeping ROEs firmly mired in low single digits. 

Markets ended the year having come full circle to where they were a year ago - expecting an end to a tightening cycle that had seen 10-year rates more than double during 2022.  But despite all the volatility we’ve seen, 10-year Treasuries are almost exactly where they were twelve months ago. 

Markets were once again dominated by the outlook for interest rates and the macro-economic outlook in November, with rate markets undoing the previous two months’ swelling yields on softer data – led by US payrolls – strengthening the conviction that “the Fed is done”.

Government bond yields were the main market topic of discussion once again with long term yields both rising and becoming more volatile.  US 10y yields rose a further 35 bp and on several occasions breached the 5% level for the first time since the George W Bush presidency. 

September markets were dominated by interest rates and the sudden realization that central banks pausing their hiking cycle does not mean imminent cuts.  Long term bond yields accelerated their rise during the month (US +50 bp) and the impact was felt in every corner of the market from mortgage and corporate to equity markets. 

Pity the shareholders of banks.  After years of waiting for a rerating of share prices and a return to normality (rates, regulatory stability, depoliticization, etc…) they came into 2023 with the expectation that their time had come. 

A rather traditional July set against an economic and market environment in transition.  Markets generally treaded water in an air of calm anticipation as the month’s data releases generally revealed moderating growth and inflation, however not at a significant enough pace to alter the narrative.

The UK economy was front and centre in June as a surge in inflation prompted a .50% hike in official interest rates, sending mortgage rates to the highest level in fifteen years and prompting the Greek Chorus to bemoan the looming housing catastrophe. 

In a month dominated by central bank actions and debate over future direction of interest rates it is timely to remember that markets have long been dealing with the consequences of policy mishaps. 

Events in April were dominated by the echoes of the March bank meltdowns, as First Republic stumbled toward a climactic demise at the end of the month while other regional banks continued to tighten liquidity and investors anxiously unloaded bank preferred stock.

Readers who are familiar with the Jimmy Stewart classic It’s a Wonderful Life will recognize the bank run scene where George Bailey explains fractional reserve banking to customers of the Building and Loan and then proceeds to stem the tide by personally providing liquidity and giving a rousing speech that restores confidence in the institution. 

All it took was one outsized increase in Non-Farm Payroll data the first Friday in February to completely unwind the prevailing narrative that the economy was on its last legs and that rate cuts were just around the corner.

What a difference twelve months makes.  We entered 2023 with nary a discussion of COVID variants or restrictions outside of China, and with an aggressive cycle of interest rate hikes in the rear-view mirror.  To be sure there is still plenty of COVID-related debate in policy circles, but it is generally backward looking and more focused analysis of pandemic era decisions. 

And thus, not with a whimper but with a bang did 2022 pass into history.  The year, which saw the most serious attempt to normalize monetary conditions since the Global Financial Crisis witnessed, an unprecedented scale of monetary tightening which upset both markets and economies.

 “A fool and his money are lucky enough to get together in the first place.  Gordon Gekko”   November was already shaping up to be an interesting month – Zuckerberg’s apology for the $600 billion bonfire [...]

The ignominious end of the buffoonish Roman Emperor Nero’s reign famously led to the “Year of the Four Emperors” in 69 AD, a time marked by duplicitous scheming and great volatility. 

Having collectively spent the last 18 months with the heads in the sand about the looming inflationary crisis central bankers went full circle in attempt to channel their inner Paul Volcker to slay the monetary dragon. 

The strength of the USD was at the forefront of market developments in August, as Europe’s energy woes and sclerotic growth elsewhere propelled the Greenback to levels not seen in twenty years.  This move in turn complicates the job of central banks already stretched to deal with sky-high levels of inflation and historically has created problems for developing economies.

July is peak season for European opera festivals but this year it was politicians across the continent that provided all the dramma giocoso.  UK Prime Minister Falstaff got things rolling by finally succumbing to pressure to resign, kicking off a leadership race that is unlikely to augur significant policy change but will likely reduce No 10’s consumption of cheap wine (available by the suitcase load!).  

In previous commentaries we stated our belief that the degree of monetary tightening required to tip economies into recession is not significant.  In June we saw a concerted effort from central banks to accelerate hiking policies (Fed +.75%, BOE +.25%, SNB +.50% etc) while the ECB primed the market for action at the upcoming meeting in July, which set government bond markets into freefall in the first half of the month. 

In May central banks swung into action as the Fed raised interest rates by .50% while the Bank of England moved by .25%.  Both moves had been widely expected.  While inflation remained elevated concerns started to shift towards slowing growth and the first serious signs of recession risk, which now seems very likely in 2023.

April was the month when the mountebanks who administer public policy finally said the quiet part out loud. “How could we be expected to know that printing too much paper money would lead to runaway inflation??”. 

The month of March was dominated by the continuing war in Ukraine and its ongoing geopolitical and economic impact.  In response, a wave of sanctions was initiated in a broad and coordinated fashion that aimed to isolate the Russian government and economy but also had implications for the Europe. 

February was certainly a whirlwind month as interest rates, earnings and geopolitics all combined to create a highly volatile environment for all asset classes which bounced from “risk-on to risk-off” throughout the month.  

The best thing about getting to the end of January is knowing you won’t see it again for another 11 months.  This year’s version came complete with market drama, geopolitics, political scandal and economic uncertainty, while December’s twin themes of Omicron and inflation rumbled in the background. 

Inflation and the Omicron COVID variant were the main drivers of markets in December as the former’s continuing rise finally compelled central bank action with the Fed formally announcing the beginning of the tapering process for bond purchases, while the Bank of England raised its benchmark rate to .25%. 

November’s dominant themes were a continuation of issues that have been top of mind for the past several months, most notably inflation, central bank policy and COVID related developments.  Starting with inflation, data across all economic zones registered strong gains in November, further stretching the credibility of the word transitory. 

October picked up where September left off as attention remained focused on the length and depth of the inflationary cycle.  Central bankers remained united in their characterization of the phenomena as temporary, while acknowledging that continuing high inflation “was more persistent than expected.” 

The limits of government intervention were on full display in September as yet another seventies moment came to life with an energy crisis.  However, unlike the original OPEC dominated crisis, this one is completely self-inflicted, with misguided policies executed in the name of “consumer protection” and “net zero” demonstrating the folly of government by shibboleth. 

As some readers will recall, the ‘70s would have fit Mr Weber’s categorization, albeit with great music and films.  The combination of geopolitical and political turmoil and runaway inflation certainly left their marks on economies and financial markets alike. 

On July 19 the month came alive with the long-expected lifting of remaining COVID restrictions in the UK, so called Freedom Day. Unsurprisingly the “lifting of all restrictions” actually saw the introduction of a number of new restrictions, thereby dampening the expected bounce of a reopening.

Attention was once again firmly centred on the Federal Reserve in June, with the mid-month meeting upending markets while giving the commentariat a bad case of the vapours.  The cause?  News that the Fed’s “dot plot” forecast showed rate hikes by late 2022 and that policy makers have acknowledged that they might soon discuss when to begin tapering bond purchases.

The animal spirits were rampant in the crypto markets in May, with traders heeding the call of the bombastic Tesla founder to make digital currencies the tail wagging the proverbial Doge. Volatility surged to 160% on USD/BTC at one point, buffeted by Musk’s conflicting comments and increasing regulatory scrutiny.

Both inflation and taxation came to the fore in April as data continued to confirm that recent efforts at monetary stimulus have manifest themselves in higher inflation prints.

As we pass the one-year anniversary of lockdowns across large parts of the world we remember Pericles, the fifth century BC Athenian hero who had considerable experience with both pandemics and lockdowns.

February saw divergent moves in markets as equities shook off higher interest rates to finish strongly, in what will surely be a recurring theme for the balance of the year.

January got off to an auspicious start as most of Europe was pushed back into lockdown very early in the month, dampening sentiment which had been given a boost by vaccine test successes and rollout.