Five charts that matter for investors

09 May 2023

Julien Lafargue, CFA, London UK, Chief Market Strategist

Tighter credit conditions

Although the fallout of Silicon Valley Bank’s collapse in March has been largely contained and a financial crisis averted, investors still face potential repercussions that should be monitored closely. In particular, the availability of credit is starting to worsen significantly as US banks, especially smaller ones, are both less willing and able to take on risk at this stage of the cycle.

Small businesses are experiencing this phenomenon first-hand and an increasing proportion of them are flagging the challenges being encountered when trying to get new loans. With smaller banks (less than $250 billion in assets) responsible for roughly half of commercial and industrial American loans, according to Federal Deposit Insurance Corporation data, the risk is real for small- and medium-sized businesses. This has implications for broader economic growth, monetary policy and financial markets (see Tighter credit conditions points to increased selectivity for more details).

While negative at face value, tighter credit availability could be a blessing for investors. Indeed, by reining in debt levels, commercial banks are doing some of the work for their central banks, allowing them to take their foot of the brake and stop hiking interest rates. This could be good for both stocks and bonds.


Is volatility gone?

It might not feel it, but volatility has trended down this year, at least according to the “fear index” (or the Chicago Board Options Expiry Volatility Index, known as the VIX). Indeed, outside a brief spike following the collapse of Silicon Valley Bank in March, the VIX has fallen towards 20, a level that is usually consistent with a benign risk environment.

This discrepancy between how we fell and what the VIX shows may be down to technical factors and demand/supply imbalances. Indeed, the VIX is supposed to measure the expected volatility of the S&P 500 over the next 30 days, relying on options prices to do so. 

However, recent months have seen a surge in trading in short-dated options and in particular, the so-called 0DTE options which expire within a day. The significant demand for these options means that more “traditional” tenors see less trading activity and therefore may not be as good of an indicator for market sentiment. 

So, while the VIX may send signals of relative calm, many investors seem far from serene. As such, we would refute the argument that complacency is far from returning.


China’s tepid rebound

China’s economy grew 4.5% year-on-year (Y/Y) in the first quarter of this year. While this is better than expected (consensus was around 4%) and a sharp improvement compared to the 2.9% registered at the end of last year, it’s hardly a strong rebound. 

Indeed, pre-COVID-19, the country was targeting and delivering real gross domestic product (GDP) growth of over 5%. In this context, seeing China’s economy expand by only 4.5% following its reopening might seem low. One easy explanation is that while in Europe and the US, economies were repeatedly shut down during the pandemic (remember US GDP fell by 8.4% Y/Y in the second quarter of 2020), the country lived under some sort of restrictions for the best part of the last three years. As such, any rebound on the back of the “grand reopening” was likely to be limited.

That being said, it would be wrong to say that China is not reaccelerating. First, Y/Y GDP growth should mechanically accelerate in the second quarter, as a year before the economy almost ground to a halt (+0.8%). Second, a few companies heavily exposed to the Chinese consumer have made clear that this segment of the economy is doing well. Luxury behemoth LVMH, for example, indicated that it is “seeing a rapid improvement in revenue in Asia with a 14% increase in Q1 of this year compared to the year ago period, fuelled by mainland China, Hong Kong and Macau”. 

Luxury is only part of the picture, but these comments suggest that the Chinese economy is getting back on its feet.


Yield and coupons

While fixed income markets have seen yields rise substantially in the past 12 months, the asset class isn’t providing substantial income yet. 

Indeed, as the COVID-19 pandemic hit and demand for “safe” assets skyrocketed, most companies took advantage and were able to refinance, or issue, new debt with very low coupons in 2020 and 2021. As central banks turned their attention to inflation and started hiking interest rates last year, debt issuance slowed. So far in 2023, less than $500 million-worth of US corporate debt has been issued, almost 15% lower than the same period last year. 

Investors can now achieve higher yields because the price of outstanding bonds has fallen dramatically. But because so little new debt has been issued with coupons reflecting the current interest rate environment, getting much income from a bond portfolio can still be challenging.


We’re hiring!

The US Federal Reserve (Fed) is determined to cool the local job market in order to quell inflation. So far, very little progress has been made: there are still some 10 million jobs available and the unemployment rate is stuck at around 3.5%1.

Yet, some cracks are appearing. For example, the job openings rate has declined from a high of 7.4% last March to 6.0% in February. In addition, the number of US jobs available came down from 11.6 million from 9.9 million over the same period2, according to the Job Opening and Labor Turnover Survey (JOLTS) data, issued by the Bureau of Labor Statistics.

Interestingly, this decline in hiring intentions hasn’t been matched with a deterioration in the unemployment rate. One explanation can be found when looking at the disconnect between supply and demand of labour, as the US labour force has not fully recovered yet. 

This disconnect may last for some time but should eventually resolve itself. At some point, job openings will normalise, helped by the Fed’s effort to slowdown the economic momentum. With fewer opportunities to switch jobs, workers will lose their bargaining power. At this stage, wage growth should slow and the unemployment rate will probably rise. This might happen in the next six to twelve months.


Market Perspectives May 2023

Welcome to our May edition of “Market Perspectives”, the monthly investment strategy update from Barclays Private Bank.