A hard-to-read economy and expanding government bond issuance will keep investors on their toes. A simple logic has played out in markets this month. Price movements point to an anticipation that the Federal Reserve is done raising interest rates and will now start cutting in early 2024, thereby pushing down market-determined yields as it continues to ease policy throughout the year; and that all this will bode well for the economy and virtually all financial assets. Not so fast, unfortunately, for all of us who hope for greater certainty and less yield volatility. There are multiple other plausible scenarios for the trajectory of interest rates, though the drivers of uncertainty will shift notably away from the Fed. Whatever outcome eventually unfolds will be critical for the well-being of households, businesses, and investors. The market’s expectation of both “peak rates” now and rate cuts early next year has been driven by recent data and certain Fed communications. A variety of economic and price indicators suggest an increasing likelihood of a soft landing, with activity gradually cooling and inflation falling further. Meanwhile, the only Fed commentary that truly resonates with the markets, from Chair Jerome Powell, has hinted strongly that the most influential central bank in the world is done with its aggressive hiking cycle, and that its next policy move will be a downward one. Unsurprisingly, market rates have fallen sharply in response. For instance, since the beginning of November, the yield on the benchmark 10-year US Treasury bond has declined by 44 basis points, and the five-year yield has dropped by 35 basis points. The two-year yield, which is more sensitive to Fed expectations, is 16 basis points lower. This widespread move in yields has been accompanied by a substantial drop in oil prices, which has also driven stocks higher. The S&P 500 has climbed about 4.5% this month, while the Nasdaq 100 is up 6%. This combination of lower yields, falling oil prices and surging stocks has fueled hopes that inflation can further moderate without substantial damage to business investment, consumer spending and economic activity. It is certainly possible that a soft landing in the US will enable the Fed to commence interest rate cuts early next year. However, there are other equally plausible outcomes with a higher cumulative probability. What is clear now is that Fed policy will have less of a deterministic impact on market yields, especially compared to 2022 and 2023, unless the central bank were to make another policy mistake. Market developments last year were mostly about incorporating the impact of one of the most concentrated rate-hiking cycles in decades as the Fed sought to correct for its protracted mis-characterization of inflation as “transitory.” In 2023, markets adapted to the notion that higher Fed interest rates may persist for longer than was initially anticipated. In 2024, with the central bank having most likely reached peak rates, the drivers of yields will shift away from monetary policy and toward government bond issuance and economic developments. In such a paradigm shift, rates could decrease because the economy slows more than currently anticipated due to the lagged effects of aggressive policy tightening, the depletion of pandemic-related savings and various external challenges. At the same time, the downward pressure on yields from sharp disinflation could be counteracted by the government’s need to attract buyers to the substantially larger volume of bond issuance required to finance a sizable fiscal deficit and refinance maturing debt at significantly higher market rates.

Washington has for the first time added Russian liquefied natural gas to sanctions linked to the war in Ukraine. The US is directly targeting Russia’s ability to export liquefied natural gas for the first time, in a move that could cause disruptions in global energy markets that Washington has so far been keen to avoid. European countries continued importing Russian LNG even after Moscow’s full-scale invasion of Ukraine last year, which triggered an energy crisis after Moscow slashed pipeline supplies to the continent. Until recently, the US has sought to avoid disrupting flows so as not to increase the pressure on allies battling a shortage. But in early November, the US State Department announced sanctions on a new Russian development known as Arctic LNG 2 — in effect blocking countries in Europe and Asia from buying the project’s gas when it starts producing next year. Francis Bond, sanctions specialist at law firm Macfarlanes, said that by targeting the project operator, the US was seeking to “toxify the project in its entirety” and would put “pressure on any non-US companies planning to purchase the flows from Arctic LNG 2”. While the US and its allies have imposed sanctions on Russian energy projects in the past in response to the war in Ukraine, seeking to starve them of financing and equipment, this is the first time LNG supplies are directly affected. US officials sought to differentiate between existing supplies and those set to come to the market in the relatively near future, but acknowledged that the aim was to hurt Russia’s ability to profit from selling more fossil fuels. The US has not directly targeted Russia’s other major LNG projects, Yamal LNG and Sakhalin 2, which are shipping the fuel to Europe and Asia. Anne-Sophie Corbeau, gas specialist at Columbia University’s School of International and Public Affairs, said that if Arctic LNG 2 does not start exporting as planned in 2024, it “will keep the markets a bit tighter for longer”. The sanctions will hit Russia’s longer-term ambition to increase LNG supplies and rival leaders in the market such as the US and Qatar. “It’s not possible,” said Laurent Ruseckas, a gas expert and executive director at S&P Global. “It’s too hard to get it done when [Russia] is excluded from so many parts of the financial system and global economy.”

Aim is to take advantage of economic headwinds to acquire promising businesses at a discount. Investors are shaking up the venture capital market by raising money to buy out start-ups that have been shunned by venture capitalists, taking advantage of economic headwinds to acquire promising companies at a discount. In the years running up to 2022, VCs took minority stakes in new businesses with growth potential even if they lacked a quick path to profitability. Steep rises in interest rates over the past year have changed that, hammering private valuations, forcing VCs to pull back and leaving a swath of start-ups at risk of collapse. New investment groups are raising tens of millions of dollars in funding with the intention of acquiring majority ownership and operational control of start-ups in order to turn the businesses around. While still in an early phase, the trend is a further sign of the difficulty many companies face as traditional venture investment chills. Resurge Growth will acquire start-ups with the goal of providing a turnround, either because a previous valuation was too high and did not reflect the new market reality, or because operational changes are required. “There’s a real opportunity here to play a very important role, which is to help companies transition from venture ownership to private equity ownership,” Peleg said. “No one is willing to send the hard message of saying this needs a reset, and that will be the role that we play.” Other investors, such as Matthew Bradley, are also leaving venture capital to pursue start-up takeovers. Bradley, formerly chief investment officer at London-listed VC firm Forward Partners, launched Tikto Capital last year in order to buy up start-ups. Another firm, San Francisco-based Arising Ventures, has been looking to buy up start-ups with viable business models but slowing growth since its founding in 2020. Chief executive Kjerstin Erickson said that in the past year, the number of potential deals has grown fivefold. Opportunities came up when “the company has raised more money than they are worth in the market”, she said. “We’ll do the deal if we think there’s a real business underneath.” Venture capitalists have dramatically scaled back activity this year, investing just 73 billion USD in the third quarter across the world. That is down from 106 billion USD during the same period last year. At the same time, the number of venture-backed start-ups that sell to private equity groups has grown to 24 per cent of total exits over the past couple of years, tripling as a proportion of such deals since 2006 to 2010, according to data from the European tech corporate finance advisory Clipperton.

The US targeted several companies based in the United Arab Emirates in the latest round of Russia-related sanctions as it seeks to up the pressure on the Gulf country to curb ties with Moscow. With Israel’s war against Hamas costing the economy around 260 million USD every day, payouts to ultra-orthodox schools and other causes championed by right-wingers in the ruling coalition have set off a reckoning for Prime Minister Benjamin Netanyahu. The conflict is taking a harrowing toll on lives. It’s also become more expensive for Israel than first predicted and is putting a strain on public finances. But it’s the controversial handouts that have set a national debate alight and kept markets on edge as Finance Minister Bezalel Smotrich prepares within days to unveil a new budget for what remains of 2023 and then present plans for next year. Israeli assets from the shekel to bonds have recouped most if not all their losses from the aftermath of Hamas’s attack. But an aura of risk still hangs over the government’s debt. The cost to insure Israeli sovereign bonds against a default is more than double what it was before the war began. And the risk premium, or spread, investors demand to hold Israeli dollar notes over US Treasuries remains about 25 basis points higher. The unprecedented funding for religious programs and West Bank settlements was called into question long before the war upended the 520 billion USD economy, with critics warning it would suppress growth. But it stands out even more now that Netanyahu committed to paying “whatever economic price this war exacts on us.” The 2023 budget plans outlined by Smotrich envisage a spending increase of 35 billion shekels, much of it on the military and with the bulk financed by debt. Coalition funds that haven’t yet been used amount to almost 8 billion shekels. Yet the ruling parties have so far resisted fully diverting those funds or cutting the programs linked to them. Their cost exceeds the total 2023 budget for public hospitals or state-funded higher education.