Jan 13, 2022
The US treasury yield curve is once again hogging the limelight as we enter the new year 2022. Of course, it makes complete sense to watch out for the curve, given its reliability in predicting recessions since the 1950s. Investors widely track the difference between the 3-month and 10-year yield (3m10s) as well as the 2-year and 10-year (2s10s) yield, also called the “spread.” Of late, the yield curve has been flattening, yet far away from getting inversion. Though, the flattening curve itself is a sign of something ominous awaiting the economy, perhaps sluggish growth but no recession. The US economic fundamentals remain strong, though inflated. Yes, it is unfortunate as even the Fed could not properly dissect inflation. The Fed initially views it as transitory, one of the worst inflation calls in its history. As it becomes clear that inflation is here to stay for long, the Fed adopts an aggressive monetary policy, causing the yield curve to flatten with short-term treasuries reacting more to the policy shift. Last time, the yield curve inversion sustained for over a quarter beginning May 2019, stoking fears that the longest economic expansion since the great recession could end soon. Surprisingly, it took an unexpected pandemic rather than the economic fundamentals to bring the economy to its knees, helping preserve the reliability of the yield curve in predicting a recession. The US economy seems to be on a reasonably solid footing. Still, the disruptions from Omicron cannot be ruled out, as cases soar every passing day. Will the new wave hold up the Fed from its aggressive stance to focus again on growth? If you found this post interesting, do 'Like' and 'Share' it, and 'Follow' us here to access more of such exciting content. You can also write to us at beat@sganalytics.com.
Jan 13, 2022
Last Wednesday, the European Commission proposed a highly divisive policy, calling for the energy derived from natural gas and nuclear to be labeled as “sustainable” investments if they meet certain criteria.
While admitting that the proposal was not perfect, EU Financial Services Commissioner, Mairead McGuinness, claimed it struck a balance between differing opinions.
The move has subjected the European Commission to criticism, with environmental groups and climate activists accusing the EU of “greenwashing." They claim that labeling natural gas and nuclear as green energy would slow down the adoption of renewable energy.
But proponents supporting the move counter that such incentives would aid underdeveloped countries to transition from coal to cleaner alternatives.
The decision, however, is not final. The European Parliament and council of heads have four months to consider the proposal.
Could the move hurt The Union's credibility? Was the proposal well-thought-out for an entity as influential as the EU, a beacon of climate action? Could it really accelerate the world's transition to a low-carbon future?
What do you think?
Jan 13, 2022
Following the Federal Reserve’s latest monetary policy meeting in January, the Fed is set to embark on its rate hike cycle with the first hike coming as soon as March to tame stubbornly high inflation. Concerns about an impending rate hike sparked volatility across assets classes, including US high-yield bonds. However, if history is a guide, US high yield performed well in the rising interest rate environment. The ICE BofA US high yield index outperformed with an average return of 16.2% during the Fed rate hike cycles since 1994 and delivered positive returns in 4 out of those 5 instances with the exception in 1999-2001, which coincided with the dot-com bubble burst.
That said, the economic background behind the rate hike cycle this time around looks different. The US inflation rate is nearly at a 40-year high of 7%, while the unemployment rate of 3.9% is just shy of the Fed's goal of maximum employment than the previous rate-hike cycles. These factors could cause the Fed to get even more aggressive. Moreover, the Fed has doubled the pace at which it is scaling back bond purchases, putting it on track to conclude the program by March 2022. It has also hinted at shrinking its balance sheet post hiking rates, with market participants expecting it to start in June 2022. Nevertheless, the corporate balance sheets had improved substantially in 2021 to weather the aftermath of monetary tightening.
Most of the companies are in the recovery or expansion phases of the credit cycle. Additionally, the high-yield index has near-zero exposure to the technology sector (highly sensitive to change in real interest rate) and short duration (around 5 years), making them stand pat against the rate hikes.
Jan 13, 2022
The Himalayas, one of the most beautiful yet fragile ecosystems in the world, is a source of water for billions of people living in South and Southeast Asia.
China is the largest refiner of the world’s lithium and currently the biggest investor in lithium mines around the globe. Chinese scientists recently discovered ‘super-large’ deposits of lithium near Mount Everest, that could potentially produce a million tons of lithium oxide, a key element in batteries powering electric vehicles.
While this discovery could provide raw material to accelerate the fast-growing Electric Vehicles (EV) and battery storage market, prospects of mining the newly found lithium deposits would be an energy- and water-intensive operation, leading to adverse environmental impacts, and raising severe concerns over the fate of freshwater resources in the Himalayas.
Jan 13, 2022
On Sunday, #Mumbai, India’s financial center, announced the Mumbai Climate Action Plan (MCAP) to achieve net-zero by 2050, becoming South Asia’s first city to do so. The detailed plan puts Mumbai two decades ahead of India’s national goal commitment of achieving net-zero by 2070 made at COP26 in Glasgow.
A coastal city, Mumbai is at a high risk of major flooding from rising sea levels. Mumbai’s plan is even more pressing considering that Indian cities will have to brace for a massive influx of migrants from rural areas. Rising temperatures are expected to increase crop failures and major water scarcity over the next few decades.
The plan was finalized with support from World Resources Institute, India, and C40 cities network after conducting a vulnerability assessment and a GHG & natural green inventory over the past six months.
The plan focuses on six key sectors – energy & buildings, #sustainable mobility, urban greening and #biodiversity, air quality, and urban flooding & water resource management. The largest investments will have to be made in the #energy sector which accounts for approximately 72% of the 23.42 million tons of the city’s total #GHG emissions in 2019. BMC (Brihanmumbai Municipal Corporation) commissioner, IS Chahal said that the civic body is currently working on infrastructure projects worth INR 40,000 crores to mitigate the potential effects of climate change on Mumbai and make the city more climate-resilient for its 19 million residents.
Is your city next?
Jan 13, 2022
On Monday, the Securities and Exchange Commission (SEC), U.S.’s financial regulator, for the first-time proposed a climate disclosure rule that would require U.S. public companies to report on climate-related risks and impacts from their business activities in their annual reports and stock registration statements. The proposal aims to improve environmental public disclosures of corporate America, increasing transparency and holding companies accountable for their business’ climate impact. SEC chair, Gary Gensler said that the proposal was drafted in response to increasing investor demand for information on climate change factors that could affect the financial performance of the investee companies. Mr. Gensler said, “Investors with $130 trillion in assets under management have requested that companies disclose their climate risks.”
According to Morningstar, 2021 saw a record US$71 billion flow into U.S. ESG focused funds. While companies will have to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions, it is still unclear which companies will have to disclose the more extensive and complicated Scope 3 GHG emissions. According to S&P Global, 35% of North American companies have already set GHG targets, but Scope 3 emissions are not included in these targets. Legal challenges are anticipated to the proposed rule, with concerns being raised about SEC’s authority, being a financial regulator to require disclosure of corporate emissions data. The public including companies, investors, and the legal community, will have up to 60 days to give their feedback on the plan, which is likely to be finalized later this year.
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The US treasury yield curve is once again hogging the limelight as we enter the new year 2022. Of course, it makes complete sense to watch out for the curve, given its reliability in predicting recessions since the 1950s. Investors widely track the difference between the 3-month and 10-year yield (3m10s) as well as the 2-year and 10-year (2s10s) yield, also called the “spread.” Of late, the yield curve has been flattening, yet far away from getting inversion. Though, the flattening curve itself is a sign of something ominous awaiting the economy, perhaps sluggish growth but no recession. The US economic fundamentals remain strong, though inflated. Yes, it is unfortunate as even the Fed could not properly dissect inflation. The Fed initially views it as transitory, one of the worst inflation calls in its history. As it becomes clear that inflation is here to stay for long, the Fed adopts an aggressive monetary policy, causing the yield curve to flatten with short-term treasuries reacting more to the policy shift. Last time, the yield curve inversion sustained for over a quarter beginning May 2019, stoking fears that the longest economic expansion since the great recession could end soon. Surprisingly, it took an unexpected pandemic rather than the economic fundamentals to bring the economy to its knees, helping preserve the reliability of the yield curve in predicting a recession. The US economy seems to be on a reasonably solid footing. Still, the disruptions from Omicron cannot be ruled out, as cases soar every passing day. Will the new wave hold up the Fed from its aggressive stance to focus again on growth? If you found this post interesting, do 'Like' and 'Share' it, and 'Follow' us here to access more of such exciting content. You can also write to us at beat@sganalytics.com.
