2022 Global Macro Econ Overview

PREPARED BY: Chris Stanford 

DATE: 4/22/22

TOPIC: Global Macro Overview

The fed’s hawkish outlook created a volatile start to 2022. In the wake of a historic pandemic, equity valuations reached unprecedented levels. A handful of notable banks foresee a recession in the next 12-24 months. Goldman Sachs increased the odds of a recession to 35%. Skeptics have argued that the Federal Reserve is far behind the curve. “The high level of current uncertainty around the war in Europe, slowing growth, high inflation, and tightening financial conditions mean we prefer to be positioned defensively in credit,” said Becky Qin, portfolio manager, and Fidelity analyst.

Presently investors ought to pay close attention to the performance of high-yield bonds. The Fed’s 10-year quantitative easing cycle resulted in significant financial overleverage. The downside of cheap money is that it rewards riskier investment behavior, and people finance deals that would not make sense in a normal interest-rate environment. As a result of the fed’s continued aggressiveness, high-yield spreads widened by more than 125 basis points. This aggressive sell-off in bonds reflects investor fears surrounding the FOMC Committees’ projected dot plot.

The market expectation is that the Federal Reserve will change course and break away from the usual 25 basis point hike. Traders are starting to price in a 90% chance of the Fed raising 75 basis points by May. The fed is of course worried about inflation running rampant beyond 40-year highs. Following the Fed’s first rate hike of the cycle, we briefly saw the yield curve invert. This is one of the major signals of a coming recession.


Over the last decade, China achieved unprecedented levels of GDP growth. Over the past decade, average annual GDP forecasts were always well above 6%. The most recent GDP growth figure came in at 4.8%. Despite the fact that Chinese equity indexes are down more than 20% YTD, analysts believe they are still several years from a major recession. It is important to mention that signs of weakness were already present prior to the recent covid outbreak. The CCP’s decision to reimplement covid lockdowns only further accelerated the corporate bond defaults/downgrades. April 18, real estate service company E-House defaulted on a $298 million bond payment. They also failed to meet a previous deadline to release audited financials.

On April 10, Chinese Developer Zhenro defaulted on $500 million worth of debt. As a result of lacking transparency, Fitch withdrew credit ratings on a handful of Chinese corporations. The government is getting serious about fixing its transparency problems. They have chosen to initiate a series of corporate investigations. Chinese brokerage firm Everbright is one of the various companies caught in the crosshairs. Several high-profile executives and board members have departed following the announcement of an investigation into alleged corporate greed. China merchant bank is another company that’s taken a massive hit. They lost $35 Billion in two days after a decision to fire an executive without any public explanation. Investors speculate they are one of the companies potentially under investigation.

Another early recession signal is the sell-off in the Chinese Yuan/USD. This past week has been the worst week for the Yuan since 2015. Several notable economists have projected the Yuan will surpass the dollar in the next decade. The argument is that the Federal Reserve’s continual willingness to resort to Quantitative easing has already created irreplicable damage. The truth is that China is facing a similar outcome with potentially even larger potential catastrophes. Over the last 20 years, China has had this prolific build-up of private sector leverage in shadow banks. The bubble has already started to burst and it appears the problem might be too big to fix at this point. The federal reserve continues signaling an aggressively hawkish rate cycle. Simultaneously China’s central bank is in the process of easing and cutting reserve requirements. This divergence in monetary policy has put a strain on this emerging currency. The CCP has chosen not to defend against a decline in the value of the currency.


Russia is close to defaulting on its foreign-denominated debt. Sanctions imposed by the United States are clearly threatening Russia’s creditworthiness.  They are blocked from being able to access a significant portion of their foreign reserves.  The government was unable to make a $649 million debt payment that was due on April 4. They are now in a 30-day grace period until May 4. A lot of the potential impact has already been expressed in the markets. The market is a forward-looking mechanism.


Oil is down 12% month over month, despite being up 60% for the year. Following Russia’s declaration of war with Ukraine, we saw a significant surge in oil prices. The immediate reaction seems unwarranted when you dive deeper into the data. Russia makes up roughly 10% of the world’s global oil supply. European countries certainly are the most heavily impacted by Russian oil supply disruptions. European nations are the largest importers, but their foreign oil dependency is self-imposed. Most of the major European nations have set ambitious environmental standards. Undoubtedly the aim is noble, but the approach lacks practicality. Intentionally limiting the domestic oil supply without fully developed alternatives seems premature. The United States also bears some responsibility for this outcome. The Biden Administration placed heavy environmental restrictions on U.S. Oil producers. Additionally, they refuse to approve any new leases for production facilities. The consensus opinion is that this administration can do a lot more to lower prices. They will soon have no choice but to do everything they can to lower consumer oil prices. Part of our playbook over the past 45 days has been shorting oil futures. 

Nickel is one of the main commodities being impacted by Russia’s war with Ukraine. Before the recent sanctions, they controlled upwards of 11% of the global nickel supply. Nickel prices are up 102% YTD but down almost 30% over the last month. Initially when everything started happening in Russia people were overreacting in the commodity sector. Not just in Nickel but also in Oil & Gas. Nickel is mainly used in the production of stainless steel and other alloys and can be found in food preparation equipment, mobile phones, medical equipment, transport, buildings, and power generation. 

Lithium is up 433% YTD. The recent popularity of the electric vehicle industry has created strong demand for lithium batteries. Demand has far outpaced supply, and it’s created a shortage. To make matters worse China produces 16% of the world’s lithium. Their recent Covid lockdowns are only creating further supply issues. Chinese lithium inventories remain low. Difficulties to find new sources or develop new technologies to source lithium from brines make producers unable to match higher demand.

Iron ore is down 21%. Although Russia is the biggest exporter of unfinished iron, prices are down 21% YTD. The reason is that roughly 63% of the world’s iron is exported to China. The main use case for iron is structural components in larger buildings. 1/4th of the world’s construction happens in China. They have outpaced any other country when it comes to the number of new and existing developments. Hence whey they are the largest importer of iron ore. The slowdown in Chinese real estate is the main driver of iron ore’s lagging performance. Vale and Rio Tinto are two of the main global producers. We placed a series of derivate shorts against these companies over the last 6 months, and believe we will continue to see weakness. 

 Wheat is up 51% YTD. In 2020 Russia was the world’s largest exporter of wheat making up roughly 37% of the global supply. It’s important to note that the regions that are the most impacted by this are the middle east and Africa. China has chosen to start importing Russian wheat in light of everything that has been happening.

 Uranium- Uranium has been one of the best-performing assets over the past year. All this talk about oil & gas. Uranium has far outpaced the performance of Oil and gas. Over the past 6-9 months the broader investment community has started paying more attention to this commodity. Before that period I was one of the few people publishing bullish research & analysis.