Gneiss Head of Capital Markets Rich McGlashan shares his views on the impact of cyclicality on transitionary Capital Markets.
Transitionary is defined as ‘the process or a period of change from one state or condition to another’.
Although there was a risk the term ‘transitionary’ would be worn out in its recent application to inflation, it will now be used more often and more correctly with reference to the many dynamics of change being experienced domestically and globally – government in a UK context, policy rates, energy, global stability and asset markets. Markets have partially reset but in reality many measures of dislocation remain within normal bands – volatility and skew (options supply/demand characteristics) being two. We remain in a period of change on many fronts and that process is far from over. The pressures are clear, but market psychology has not yet moved to full bear-mode. The idea inflation was transitionary was a neat and palatable construct and in one respect true. Elevated for a period and then returning to more normalised levels, the issue was and remains the duration of that change – more protracted than most would suggest will be the likely out-turn.
In asset market terms, this cycle has just been a more extended version and with more amplitude, but it is still a cycle. Policy rate tightening both at home and abroad is necessary and to be expected, we have seen a decade plus of loose policy in all respects and the pendulum needs to swing the other way. As with inflation, the swing tends to be faster and more extreme than anticipated. There is the additional overlay of an employment picture that is still to a degree artificial post Covid (at least in its initial and most extreme form) and furlough.
The cost-of-living squeeze was already a factor, just further exacerbated by the energy price implications of the conflict in Ukraine, highlighting the fragility of the more general global political landscape. The recent soft commodity activity around the conflict is also a reminder that Ukraine features in the top ten for production of many soft and hard commodities beyond the second derivative energy price issue. The product of industrial action, collective bargaining and the disruption to economic activity that these frictions bring adds to the negative feedback-loop. One must have some sympathy for holding the line on the degree on wage price inflation, as once reset – higher wages will prove ‘sticky’ when conditions cool and in and of themselves, add to the inflationary loop.