Above the Fold         

Stock and Bond Divergence Spells Shift in Top Investor Worries 

Corporate bond prices reflect both the health of the respective company (namely their ability to pay their debt) and investors’ outlook on interest rates, while stock prices are mainly based on the growth prospects of the business’s earnings over time. Bonds tend to be more stable than stocks and can remain fairly resilient even when share prices are moving lower. Government bonds (issued by stable nations) are more dependent on macroeconomic forces that impact current interest rates, as well as investors’ sentiments for where rates will go while that bond is still trading. Government bonds also tend to act as a safe haven for investors when recession fears are increasing.  

For much of the year, bond (corporate and government) prices and stock prices have been moving lower in unison. While there are a multitude of reasons for this, the simple explanation is that investors feared slowing earnings growth, higher interest rates, the potential for a recession, and the biggest risk, inflation. But as markets round out 2022, there’s been a substantial rally in government bonds, with the key 10-year Treasury falling to 3.5%, its lowest level in three months, off from its high of 4.231% in October (rates fall when prices rise). Other forecasts and futures prices also suggest that investors see inflation moderating near the Federal Reserve’s (the Fed’s) target of 2%, but expect the Fed to overcorrect with continued rate hikes. These data and others suggest that investors are now becoming more worried about recession and less concerned that inflation will stick around. This is likely to shift the way markets react to poor economic data, which, for much of the year, has been welcomed as it might sway the Fed to slow its hawkish march. Now, bad news might actually be bad news… 

Three Things                              

Largest Health Care Merger of the Year 

Over the weekend, biotech behemoth Amgen agreed to acquire Horizon Therapeutics PLC for $27.8 billion or $116.50 for each horizon share. Based in Ireland, Horizon develops medications to treat rare autoimmune and severe inflammatory diseases with sales focused mainly on the United States. Tepezza, the company’s most profitable drug, is used to treat thyroid-related eye disease and helped motivate a 47% increase in Horizon’s overall net sales. The company expects Tepezza to be approved for use in Europe and Japan in the near future. This acquisition marks a fairly busy year for biotech M&A (mergers and acquisitions) as peers such as Pfizer Inc., Merck & Co. and Johnson & Johnson all announced deals in recent months.  

Microsoft Makes an Interesting Investment Abroad 

Legacy tech giant Microsoft will acquire a roughly 4% stake in the LSEG (London Stock Exchange). The investment is part of a 10-year partnership that involves next-gen data and analytics, as well as cloud computing products. The deal commits LSEG to spend a minimum of $2.8 billion on Microsoft cloud-related products and LSEG will also migrate its data platform and other critical tech infrastructure to Microsoft’s Azure cloud product. In a statement, Microsoft chairman Satya Nadella said, “Advances in the cloud and AI will fundamentally transform how financial institutions research, interact and transact across asset classes, and adapt to changing market conditions.” 

There’s a Growing Divide at the Federal Reserve 

Now that the Federal Open Market Commitee is standing atop the sharpest rate-hike cycle in history, there’s increased divergence among members on the next steps. Phase one of the cycle, sort of the “shock and awe” bit, is over. In the next phase, the Fed is expected to move slower and give data a chance to catch up in order to observe the effects of its actions. According to statements and sources, the committee is experiencing a bifurcation of member sentiment, with some thinking they’re close to the peak of rate hikes, and others still ready to raise until clear evidence of the death of above-trend inflation is confirmed. Mr. Powell did recently say the Fed “[doesn’t] want to trash the economy and clean up later.” We will certainly learn more this week. 

In the Know                              

The First Official Government Bond 

The year was 1693, more than 13 months before the Bank of England was established (it was formed to mainly fund the country’s battles). In order for England to fund his war again, King Louis XIV of France (and King William III and the English parliament) decided to borrow money from wealthy investors around London and even overseas. Lenders/investors could lend in increments of £100 and receive 7% in interest, paid semiannually by the Exchequer. Unfortunately, if the investor were to pass away, the actual investment (principal) paid to the government was extinguished, though living heirs could still collect the interest. The scheme was known as King William’s Tontine.