Market volatility is hampering companies’ ability to raise funds

Market volatility has reduced the ability of U.S. companies to raise cash through public stock sales, a sign of how the prospect of tougher Federal Reserve policy is already spreading from the headquarters of the central bank in Washington.

U.S. financial conditions gauges show it’s getting slightly harder and more expensive for companies to raise money in the stock market, according to a popular index calculated by Goldman Sachs.

Investment banking economists produce an index of financial conditions, closely watched by market participants and central banks, that takes into account borrowing costs as well as movements in the stock market and the value of the dollar.

A recent sell-off in the stock market that sent down an average of 33% of company stocks across the entire Russell 3000 Index played a significant role in the recent deterioration in conditions.

Tech companies that listed their shares on the stock exchange in 2021 are down 34% on average from their offering price, Dealogic data shows, a trend that has discouraged other companies from following them in the markets. public. Several companies postponed their planned listings with late notice, including human resources software firm JustWorks and bitcoin miner Rhodium.

Still, investors and economists believe the Fed will be unaffected by this turmoil as it embarks on an aggressive cycle of higher interest rates.

“It is not surprising that the Fed, at this point, is saying that it is not concerned about market movements,” said Jean Boivin, former deputy governor of the Bank of Canada now at the BlackRock Investment Institute. . “If they said otherwise, it would be tying their hands.”

But, “if the market environment becomes sustainably more bearish and it starts to affect [economic] trust, I don’t think they can just ignore that,” he added.

Fed Chairman Jay Powell expressed little concern about the recent market turmoil at the two-day policy meeting that ended Wednesday. Asked at a press conference that day, he seemed unfazed by recent swings and called the modest tightening in financial conditions a sign of the Fed’s success in adequately preparing market participants.

“We feel that the communications we have with market participants and with the general public are working and that financial conditions reflect the decisions we make in advance,” Powell said on Wednesday. “Monetary policy works significantly through expectations, so it is appropriate in its own right.”

Traders are now forecasting up to five quarter-point interest rate hikes this year from March, up from four just before the January meeting. The Fed is currently ending its asset purchase program, which has helped support financial markets since the start of the pandemic, a process that will end in March.

Fed watchers and Wall Street executives believe it will take a much more substantial drop in stock markets to change the central bank’s calculus on the way forward for interest rates. Greg Jensen, co-chief investment officer at Bridgewater Associates, believes US stocks may need to fall as much as 20% from today’s levels to warrant a course correction, a view shared by Evercore. HSBC strategists said tensions in financial markets will need to become “much more acute”.

The expectation of higher rates—and the effects these would have on growth and inflation—led to a $22 billion Treasury market sell-off, setting the stage for the U.S. Treasury pays millions of dollars more when it borrows. But yields still remain depressed by historical standards, having hit all-time lows since the start of the pandemic.

The effects have so far not trickled down to credit markets, which investors say is the main reason the Fed has been unfazed so far. With the exception of an expected jump around the Fed meeting, new debt issuance continued at a healthy pace in January, even after a record year in 2020, and near record high in 2021. The premium that Investor demand to hold riskier corporate bonds has increased, but not significantly.

“Usually the credit markets are the ones that crash and signal what’s going to happen with the stock markets. And it’s not like that this time,” said Monica Erickson, portfolio manager at DoubleLine Capital.

A Moody’s measure that tracks the quality of investor protections in debt deals remains near its worst levels on record. Agreements with weaker investor protections, or covenants, proliferate in times of accommodative monetary policy, when it’s easy for companies to borrow and they have little incentive to meet investors’ needs.

“Unless volatility trickles down to corporate credit spreads, there’s no translatable effect on the outlook,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. “Only if the data is materially above or below their outlook would that dictate a shallower or steeper trajectory for rate hikes.”

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