Unnerving tightening

Chief Investment Officer's team
20 June 2022
Unnerving tightening
“Whatever it takes” is not market-friendly as Western central banks are all-in against inflation


  • “Whatever it takes” is not market-friendly as Western central banks are all-in against inflation
  • The Fed delivered a 75 basis points hike, while the BoE and ECB confirmed their hawkish stance
  • It’s a very tough end to H1-2022 with almost all asset classes deeply in the red.

Last week was another difficult one across asset classes, hit hard by the combination of monetary tightening and growth scares. With regards to the former, central banks are aggressive, starting with the Fed and last week’s jumbo 75 basis points hike. The forward-looking projections include another cumulative rise of 175 basis points for policy rates in 2022. While the largest inflation problem lies in the US, with a tight labor market and a consumption frenzy, no one is really immune. The ECB confirmed their decision to accelerate its rate lift-off and discussed the need for an “anti-fragmentation” instrument to counter the negative impact on sovereign bond markets. Having higher rates for everyone but indebted governments seem impossible, but for the ECB the solution is always to create a program and an acronym. It confirms anyway that they mean business. Only Japan -who tried to generate inflation for several decades- holds on and left its stance unchanged last week. Even the usually very placid Swiss National Bank surprised with a 50 bps hike and a martial communique. The war against inflation is declared, with no mercy until victory is in sight. It’s a new and very market-unfriendly iteration of the “whatever it takes”. While inflation could take months to abate, growth is already starting to soften, and markets are as always even quicker. The combination forms a downward spiral: asset-classes are all affected by stagflation fears, adding pressure to the economy through negative wealth effect and damage on corporate financials and sentiment.

So what to do? Our central scenario remains unchanged: we expect extreme volatility in the near-term, until a pause becomes credible in the global tightening. This should ultimately unlock the value we already see in asset valuations in a scenario where growth is hit but not derailed. Patience is paramount.

Cross-asset Update

Here we are again with recession jitters. Powell’s message does matter, and it is resounding louder than ever, when he requires that there must be compelling evidence of falling inflation for months before ‘job done’ can be declared. But inflation is a lagging indicator, and monetary policy a blunt and backward-looking tool, so by the time Fed officials have declared themselves happy with price pressures having receded enough, recession is unavoidably going to unfold. Yet, as already clarified numerous times in this publication, however much investors can be concerned about a forthcoming contraction of the US economy, it will most likely be a late 2023 occurrence in our view, rather than a more immediate one. The business cycle is reversing towards trend, but not collapsing. US demand is cooling as per last week’s retail and inventory data, while at the same time households and corporate balance sheets are strong enough to keep the odds of a recession in the next 12 months at very low levels. It will take time before the housing market cools significantly, excess savings are depleted and fading confidence dents hiring.

So, should one buy stocks taking advantage of excess worries for something that will materialize only further down the road? After all, equities have historically topped out a few months before a plunge in the business cycle, not a couple of years in advance, hence current pricing should be good enough. We think that not all the bad news could be out yet, considering the earnings outlook. The Conference Board Measure of CEO Confidence has just suffered one of the steepest sequential drops in decades, collapsing to readings which in the past coincided with profits recessions, that is negative year-over-year bottom-line growth. And this is at odds with bottom-up analyst estimates, pointing to more than 10% YoY earnings growth in 2022. According to Yardeni Research, profitability for communication services, the consumer discretionary and staple sectors is starting to be revised down, while “the others are still flying high”.

In summary, we see the opportunity to add to risk on further volatility driven by an earnings recession. By the time that happens, quite some tightening should have been achieved by the Fed and the early-November midterm elections will have drawn close enough to have been at least partially discounted as a risk event. Bank of America Merrill Lynch strategists wrote in a recent report that history says that the next bull market is just “months away”. We are not ready to settle for that much yet, but a meaningful bottom should at least be seen in our view. Investors should use that time wisely by getting prepared with a sensible investment list, rather than panic and squint for a forthcoming contraction.

Fixed Income Update

What Fed did last week was not entirely unexpected by the market. However, the ensuing volatility post the FOMC meeting shows the state of the market. The 10-year US Treasury yields oscillated between 3.15% and 3.47% before closing the week at 3.23%. There was one major key takeaway from the FOMC meeting statement and the Q&A session. The statement removed a key sentence from the May FOMC related to appropriate monetary policy being able to bring down inflation while maintaining a solid job market. This sows doubts about the Fed’s softish landing theory. Powell mentioned that pathways to a soft landing “have become much more challenging.” This was also reflected in the Fed revising its future growth and unemployment projections. The unemployment rate was seen rising from 3.7% at end-2022 to 4.1% in 2024; growth forecasts were cut to 1.7% in 2022 and 2023, from 2.8% and 2.2% in March.

Last week was voluminous in terms of central bank actions. BOE hiked policy rates by +25bps as expected (With three dissents favoring 50bps); Swiss National Bank unexpectedly hiked by 50 bps; BOJ continued its policy divergence with global peers; kept rates unchanged & no change in YCC target of 0%.

This change in tone from the Fed has some implications across both the Rates and Credit segments. While the Fed dot plot points to a policy rate of 3.4% at the end of this year, markets price in 3.7%. Moreover, according to the market, the peak Fed rate could be 4.34% in H1 2023. If the Fed is forced to cross the 4% policy rate in the current fight against inflation, the 10-year could easily travel to 3.5%. This tussle between market expectation and Fed’s communication could drive near-term volatility. If more traders start to price higher rate hikes, we may see a further blowout in spreads across credit. This would work out negatively for longer-duration bonds even from the strongest issuers. Hence, we would advise against extending the duration risk of portfolios. The current sweet spot seems to be between 3 to 5 years.

Most credit segments currently trade around the higher range of their YTD spreads. The spread blowout has been severe for the high yield sector, with US High Yield spreads crossing 500 bps for the first time post-October 2020. This is still lower than average recession-era spreads. Similarly, Pan-European HY spreads widened by 42 bps last week, leading to a weekly loss of 1.5%, even though ECB’s emergency meeting led to compression in the sovereign yields from the peripheral Europe sovereigns. The Italy-Germany 10-year spread premium fell from the intraweek highs of 245bps to as low as 188bps by the end of the week. GCC debt has outperformed the broader EM Sovereigns by 5.3% YTD, indicating the resilience due to high oil prices.

Equity Update

The markets reacted adversely to Central bank tightening (though expected), persistent inflation, and higher sovereign yields though the Fed, BOE and ECB did not overly surprise with rate hikes or direction. Global equities were down 6% last week and have fallen 10% in the first half of June, taking year to date losses to 22%. A broad sell off last week, from the US -6%, with tech (usually the laggard this year) performing just a little better, Europe -4.6% and Japan -7%. Emerging markets had the UAE, India and China all trading down. China is announcing new lockdowns, but the fewest cases since February. EM equities have been the better performers as of late, with smaller drawdowns but with still largely negative weekly closes. All global sectors fell last week, with energy, the only sector in the green this year, losing 14% as demand fears and a planned windfall taxation on US oil producers (to provide incentives on fuel purchase to consumers) played on sentiment. Also, the selloff of crypto and unprofitable tech is triggering more liquidations and negative sentiment for the broader market, as well as flight to quality.

At what level and when will the equity markets settle? As central banks’ tightening starts to dampen consumer demand and supply chain issues improve with global logistics going back to pre-Covid levels, we should see equities start to perform better supported by valuations and growth metrics. The 12-month-forward P/E ratio for the S&P 500 is 15.8, below both the 5-year average (18.6) and the 10-year average (16.9). Our year-end fair values indicate upside from here, although this year it’s about often revising where growth will settle, with many opposing forces still in play. So, while we wouldn’t rush, we advocate maintaining a diversified portfolio and adding to quality companies, with steady growth and strong cash flows at serviceable leverage levels.

Whilst margins were resilient for corporates globally in Q1, this could be seen as a lagging indicator. Concerns increase about a possible recession in 2023, amid hawkish central bank monetary policy, aimed at controlling inflation with consequences on economic growth, downgraded by public and private institutions alike. The hawkish policy stance from the Fed is further tightening financial conditions with the US dollar appreciating, a rise in mortgage rates, and a drop in equity prices. The more interest-sensitive sectors of the economy, housing and manufacturing, are seeing the effect of higher interest rates. On the bright side the still-strong labor market is supporting wage income and households have just recently begun to use the “excess saving” from the pandemic stimulus.

Slowing economic growth is finally being reflected in Q2 2022 earnings growth estimates, which have been brought down for the S&P 500 from 5.9% on March 31 to 4.3%. However, according to a FactSet report despite higher inflation, rising interest rates, military conflict in Ukraine, fear of recession, and stock price declines, analysts continue to have an unusually high number of Buy ratings on stocks in the S&P 500. Of the 10,708 ratings on stocks in the S&P 500, 56.9% are Buy ratings, 37.7% are Hold ratings, and 5.4% are Sell ratings. The 5-year average percentage of Buy ratings is 53.3%.

Written by:


This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), licensed and regulated by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”) and subject to regulation, supervision and control of the Central Bank and SCA, having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.


Data/information provided in this document are intended solely for information or illustrative purposes and are not designed to initiate or conclude any transaction.

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accepts no responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they maynot be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.


This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.


None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.


Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.


Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investormay lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.


This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.


This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.


Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.