June proved a bleak month for almost all stock markets, concluding a merciless first six months of 2022. Whilst there was a modest attempt to recover some of the losses toward the month end, most indices still saw losses of 5% or more. That said, the most notable movements were actually seen in government bond markets. The US benchmark yield seeing some astonishing movements rising from 2.8% to 3.5% during the month, before finishing back below 3% at the month end.
Goodbye Boris
NATO General Secretary warns we must prepare for a long war in Ukraine.
Russia cuts gas supplies to Germany.
Sweden and Finland apply to join NATO.
Russia defaults on its foreign debt for the first time in a century.
UK inflation hits 9.1% and BoE predicts it will go over 11%.
OECD cuts UK economic growth forecast for 2022 and 2023 to 3.6% and ‘zero’.
CPI inflation hits 8.1% in Europe.
ECB working on crisis tool to avert fragmentation in European bond markets.
US Federal Reserve raise interest rates by 0.75% - the largest increase since 1994.
US consumer confidence drops to a 16-month low.
Beijing and Shanghai start to ease lockdown restrictions.
The month’s falls resulted in a number of stock markets, including the S&P 500, seeing declines of more than 20% for the first half of 2022. For the US, this marked the worst first half for more than 50 years. At a sector level, only oil and gas finished the first six months in the black and unsurprisingly technology was the worst performing sector, down more than 30%.
As June evolved, the initial market movements reflected a further upward move in interest rate expectations on the continued hardening of central bank actions against inflation. However, the latter part saw much more focus on the economic growth outlook and the potential adverse effect of the interest rate rises, with government bond yields declining.
In spite of the ongoing conflict in Ukraine, the majority of commodities have weakened notably from the highs seen in early March. Although oil has remained fairly range bound, even it has fallen by more than 10% from the March highs. This in combination with the easing of covid restrictions in China, and in turn the easing of the pressure within global supply chains, offered reassurance that at least the ‘transitory’ sources of inflationary pressure were easing. However, for inflationary pressures to cool this will need to feed through to both consumer and company expectations of both future inflation and wage levels, which still remain high.
Political developments in the UK have continued to amaze, with Boris Johnson’s premiership culminating in a fittingly memorable, but surreal conclusion. Whilst ordinarily the resignation of a Prime Minister would be considered a negative, it appears to have caused a sense of relief, with Sterling rallying in response. Although far from ideal given the economic backdrop, it does at least coincide with the quieter summer holiday period, with expectations that a new Prime Minister will be in place by September.
Whilst there remains, some uncertainty as to how China approaches its zero covid policy going forwards, the reopening of the country and easing of travel restrictions, coupled with a more benign inflationary backdrop suggests that there should be a decent pick up in Chinese economic activity. In turn, this should prove a welcome boost to the global economy given the prospects in many western economies.
The era of ‘cheap money’ appears to be coming to an end. A cost-of-living crisis together with rising interest rates is creating economic headwinds. Not since the 1970s and early 1980s have we faced such a risk to our standard of living. The extent of the economic downturn remains difficult to predict, forward-looking indicators are weak and consumers appear to be cautious, despite still very low levels of unemployment. The upcoming company earnings season will be closely watched, as in spite of the deteriorating outlook, analysts still expect corporate earnings to grow.
All things considered, we believe that valuations have adjusted quite materially to the uncertain backdrop and are now well placed to weather potential storms ahead.
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It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced. Unless otherwise stated, the source of statistical and other data is Alpha Portfolio Management, a trading name of R C Brown Investment Management PLC, Authorised and Regulated by the Financial Conduct Authority (registration number 146002). Registered in England and Wales (No. 2489639) at 1 The Square, Temple Quay, Bristol BS1 6DG.
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