Redhedge’s Seminara on macro environment and impact on financial markets

In emailed commentary, Andrea Seminara, CEO of Redhedge, discussed the macroeconomic environment and its impact on financial markets, particularly focusing on interest rates, credit markets, and inflation expectations.

“As the macro-economic backdrop worsens and slowing activity tempers inflation expectations, rates and credit markets have reacted very positively to the hope that the Federal Reserve may change to a more dovish stance. While it is clear that the markets’ overly bearish view on rates when 10Y UST was near 5% and 10Y GDBR at 3% was unjustified, we believe it is equally misguided to think that now, just because rates are a bit tighter, that everything is hunky-dory.

“Our main concern is that as higher rates slowly work their way through the system, the dispersion in credit will only increase. Numerous issuers who have overindulged in debt (we are looking at you, PE Sponsored LBO’s) are facing slowing EBITDA growth and sharply higher interest costs as they extend their outstanding debt and struggle to pass on higher costs to a consumer struggling with higher living costs.

“We have already seen the difficulties facing the real-estate sector, as issuers across the spectrum are facing real trouble. The most recent example is SIGNA, an Austrian real-estate conglomerate encompassing retail chains, office development and a real-estate operating business. While there are no reported total figures, it is estimated that they have close to €25 billion ($26.7bn) debt outstanding across their businesses, the majority of which are bank loans. Against this backdrop of real difficulties in specific industries, we expect bank stress to increase, as they adjust their loan loss provisions and further restrict lending.

“This leaves central banks between a rock and a hard place. If inflation doesn’t come down (or starts to increase again) we expect hiking will cause more than a ripple across financial markets and may make it quite likely that something breaks. Doing nothing, letting inflation expectations pick up again (with all the difficulties that come with that) doesn’t look enticing either. In either scenario, being outright long credit doesn’t seem particularly attractive, especially considering spreads are once again near the year-to-date tights.”

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