as central banks ratchet rates higher, the higher yields, wider credit spreads and relatively more attractive equity valuations are attracting investors to put cash to work. A key assumption appears to be that the interest rate tightening cycle in much of the G7 will be over by the end of 2022, and that rates will start to be cut in H1 2023.


So what are some of the risks to this scenario? This is not by any means intended to be comprehensive, but rather to highlight some factors, which do not appear to be getting that much ‘airtime’, as the markets’ chattering classes focus on second-guessing central bank rate cycles. The Fed rate cycle has been put on a speedy path to neutral relative to the 2016 to 2019 cycle, but its balance sheet reduction (QT) has only just begun, and will be rather more noticeable in H2 2022. While this was a slow burn factor in the prior cycle, the fast-tracking of the rate cycle both in the US and in the broader G10 ex-Japan will likely be felt more quickly.


Secondly, 1-year default probabilities have risen sharply in a number of sectors, according to S&P, highlighting in the US above all the Healthcare, Communications Services and Consumer Discretionary sectors.


Median market signal 1-year probability of default by US sector (%)


Data compiled July 13, 2022. Includes publicly traded U.S. companies and investment firms that primarily trade on the Nasdaq, NYSE or NYSE American. Probability of default scores calculated using S&P Global Market Intelligence’s Market Signal probability of default model, which is based primarily on volatility of share prices, taking into account country and industry-related risks. S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Industries are classified according to the Global Industry Classification Standard of S&P Global Market Intelligence. Source: S&P Global Market Intelligence


1-YEAR DEFAULT PROBABILITIES HAVE RISEN SHARPLY IN A NUMBER OF SECTORS, ACCORDING TO S&P, HIGHLIGHTING IN THE US ABOVE ALL THE HEALTHCARE, COMMUNICATIONS SERVICES AND CONSUMER DISCRETIONARY SECTORS.


16 | ADMISI - The Ghost In The Machine | Q2 Edition 2022


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