Markets, as the cliche has it, hate uncertainty. To which the only sensible response is “who doesn’t?”. But markets don’t seem to hate it very much at the moment.
There is, after all, an awful lot of uncertainty about. The upheaval that is MiFID II, the much more extreme upheaval that is Brexit, the first interest rate hike cycle in a decade in the US, the beginning of the end of quantitative easing on both sides of the Atlantic and a new person in charge of the Fed.
Not to mention the kind of geopolitical upheaval that would once have had investors running for the hills (almost literally). Oh, and not forgetting that the most powerful man in the world is … a little unorthodox.
And yet markets are as buoyant as they’ve been for a long time.
The S&P 500 has had one of its best years since the financial crisis, notching up dozens of new record highs to finish the year roughly 20% up (but still under-performing several other major markets). Credit markets have ground ever lower: the CDX Investment Grade index was at 50 in mid-December, a level not seen since 2007. And volatility, as measured by the VIX, hit an all-time record low of 8.8 in July.
Capital markets activity has as a consequence been full-steam ahead throughout 2017 and looks like carrying on in the same vein in 2018.
Debt capital markets bankers especially have had a very busy year: more than US$4trn of investment-grade corporate debt has been issued during 2017, equaling the record set last year; almost half a trillion dollars of high-yield debt has been sold; IPO proceeds at US$190bn are up more than a third on last year; while a host of eye-wateringly large loan deals have been signed.
Is it a good thing that the markets are taking all the upheaval in their stride? Or is it a sign of complacency?
You can make the case either way. But one thing is certain, despite their claims to extreme cleverness banks aren’t actually very good at getting ahead of the curve. Chuck Prince was reviled for promising to keep dancing while the music was still playing, but he was only reflecting reality. A bank’s gotta bank.
So is it all about to go horribly wrong? At the risk of IFR being drummed out of the Amalgamated Union of Know-It-All Journalistic Prognosticators, the real answer is “who knows?”.
We will no doubt find out soon.
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