As the Federal Reserve hastens the unwinding of its balance sheet this month, some investors worry that quantitative tightening may weigh on the economy and make this year even more brutal for stocks and bonds.
After roughly doubling its balance sheet to $9 trillion after the pandemic, the Fed began unloading some of the Treasuries and mortgage-backed securities it holds in June at a pace of $47.5 billion.
It has announced that this month it is increasing the pace of quantitative tightening to $95 billion.
The scale of the Fed’s unwinding is unprecedented and the effects of the central bank ending its role as a consistent, price-insensitive buyer of Treasuries has so far been hard to pinpoint in asset prices.
However, some investors are cutting back equities or fixed income as quantitative tightening accelerates, wary that the process could combine with factors such as higher interest rates and a strengthening dollar to further weigh on asset prices and hurt growth.
“The economy is already in a glide path to recession and the Fed's quickening pace in terms of QT will accelerate the decline in stock prices and increase in bond yields,” said Phil Orlando, chief equity market strategist at Federated Hermes, who recently increased his cash allocation to a 20-year high.
The Fed's tighter monetary policy has weighed on stocks and bonds in 2022. The S&P 500 is down 14.6 per cent while the yield on the benchmark 10-year US Treasury, which moves inversely to prices, recently stood at 3.3 per cent, after surging 182 basis points this year.
Although recent data has shown that the US economy has remained resilient in the face of higher interest rates, many economists believe tighter monetary policy is increasing the chances of a recession next year.
The New York Fed projected in May that the central bank would shave $2.5tn off its holdings by 2025.
Estimates vary for how this will affect the economy: Orlando, at Federated Hermes, said every $1tn in Fed balance sheet reduction would equate to an additional 25 bps in implicit rate increases.
Ian Lyngen, head of US rates strategy at BMO Capital Markets, estimates it could add up to 75 bps through the end of 2023 alone.
On the other end, Solomon Tadesse, head of North American Quant Strategies at Societe Generale, believes the Fed will ultimately cut $3.9tn off its balance sheet, equating to about 450 bps in implicit rate increases.
The Fed has already raised rates by 225 bps and another 75 basis point increase is expected later this month.
“It could be the ramp-up in [quantitative tightening] that could trigger the next fall in markets,” said Mr Tadesse, who believes the S&P could drop to a range of 2,900 to 3,200.
Investors next week will watch August consumer price data for signs inflation has peaked. The Fed will hold its monetary policy meeting on September 21.
Jake Schurmeier, a portfolio manager at Harbor Capital Advisers, said reduced liquidity from tightening financial conditions is already making it more difficult to take large bond positions and could contribute to more volatility ahead.
“It gives us pause before we make any moves,” he said.
While Schurmeier finds longer-dated Treasuries attractive, he is “hesitant to add more risk until volatility has dampened down”, he said.
Timothy Braude, global head of the outsourced chief investment officer programme at Goldman Sachs Asset Management, has been reducing his equity allocation in anticipation of more volatility due to the Fed's quantitative tightening.
“It is very hard to tell which markets are going to be the most affected,” he said.
To be sure, some investors doubt quantitative tightening will have an outsize effect on markets.
“The increase in the pace of QT has been known since the Fed announced its QT plans in May,” strategists at UBS Global Wealth Management wrote on Thursday.
“However, when combined with a hawkish Fed, market sentiment focuses on the higher pace even though the impact to the marketplace over the long term is not material.”
The energy crisis in Europe, the pace and duration of the Fed's interest rate increases, and a potential US recession are expected to trump quantitative tightening as market drivers, said David Bianco, chief investment officer for the Americas at the DWS Group.
“We are not dismissing the risks of QT but they pale in comparison to the risks of where the Fed hikes the overnight rate and how long they have to stay there,” he said.
Groom and Two Brides
Director: Elie Semaan
Starring: Abdullah Boushehri, Laila Abdallah, Lulwa Almulla
Rating: 3/5
AT%20A%20GLANCE
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Ticket prices
General admission Dh295 (under-three free)
Buy a four-person Family & Friends ticket and pay for only three tickets, so the fourth family member is free
Buy tickets at: wbworldabudhabi.com/en/tickets
Our legal consultant
Name: Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
How does ToTok work?
The calling app is available to download on Google Play and Apple App Store
To successfully install ToTok, users are asked to enter their phone number and then create a nickname.
The app then gives users the option add their existing phone contacts, allowing them to immediately contact people also using the application by video or voice call or via message.
Users can also invite other contacts to download ToTok to allow them to make contact through the app.
Dust and sand storms compared
Sand storm
- Particle size: Larger, heavier sand grains
- Visibility: Often dramatic with thick "walls" of sand
- Duration: Short-lived, typically localised
- Travel distance: Limited
- Source: Open desert areas with strong winds
Dust storm
- Particle size: Much finer, lightweight particles
- Visibility: Hazy skies but less intense
- Duration: Can linger for days
- Travel distance: Long-range, up to thousands of kilometres
- Source: Can be carried from distant regions
Champions parade (UAE timings)
7pm Gates open
8pm Deansgate stage showing starts
9pm Parade starts at Manchester Cathedral
9.45pm Parade ends at Peter Street
10pm City players on stage
11pm event ends
UAE currency: the story behind the money in your pockets
Terror attacks in Paris, November 13, 2015
- At 9.16pm, three suicide attackers killed one person outside the Atade de France during a foootball match between France and Germany
- At 9.25pm, three attackers opened fire on restaurants and cafes over 20 minutes, killing 39 people
- Shortly after 9.40pm, three other attackers launched a three-hour raid on the Bataclan, in which 1,500 people had gathered to watch a rock concert. In total, 90 people were killed
- Salah Abdeslam, the only survivor of the terrorists, did not directly participate in the attacks, thought to be due to a technical glitch in his suicide vest
- He fled to Belgium and was involved in attacks on Brussels in March 2016. He is serving a life sentence in France
White hydrogen: Naturally occurring hydrogen
Chromite: Hard, metallic mineral containing iron oxide and chromium oxide
Ultramafic rocks: Dark-coloured rocks rich in magnesium or iron with very low silica content
Ophiolite: A section of the earth’s crust, which is oceanic in nature that has since been uplifted and exposed on land
Olivine: A commonly occurring magnesium iron silicate mineral that derives its name for its olive-green yellow-green colour
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Dubai Bling season three
Cast: Loujain Adada, Zeina Khoury, Farhana Bodi, Ebraheem Al Samadi, Mona Kattan, and couples Safa & Fahad Siddiqui and DJ Bliss & Danya Mohammed
Rating: 1/5
Hamilton profile
Age 32
Country United Kingdom
Grands Prix entered 198
Pole positions 67
Wins 57
Podiums 110
Points 2,423
World Championships 3
TCL INFO
Teams:
Punjabi Legends Owners: Inzamam-ul-Haq and Intizar-ul-Haq; Key player: Misbah-ul-Haq
Pakhtoons Owners: Habib Khan and Tajuddin Khan; Key player: Shahid Afridi
Maratha Arabians Owners: Sohail Khan, Ali Tumbi, Parvez Khan; Key player: Virender Sehwag
Bangla Tigers Owners: Shirajuddin Alam, Yasin Choudhary, Neelesh Bhatnager, Anis and Rizwan Sajan; Key player: TBC
Colombo Lions Owners: Sri Lanka Cricket; Key player: TBC
Kerala Kings Owners: Hussain Adam Ali and Shafi Ul Mulk; Key player: Eoin Morgan
Venue Sharjah Cricket Stadium
Format 10 overs per side, matches last for 90 minutes
When December 14-17
Cultural fiesta
What: The Al Burda Festival
When: November 14 (from 10am)
Where: Warehouse421, Abu Dhabi
The Al Burda Festival is a celebration of Islamic art and culture, featuring talks, performances and exhibitions. Organised by the Ministry of Culture and Knowledge Development, this one-day event opens with a session on the future of Islamic art. With this in mind, it is followed by a number of workshops and “masterclass” sessions in everything from calligraphy and typography to geometry and the origins of Islamic design. There will also be discussions on subjects including ‘Who is the Audience for Islamic Art?’ and ‘New Markets for Islamic Design.’ A live performance from Kuwaiti guitarist Yousif Yaseen should be one of the highlights of the day.
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