In October, we turned more constructive based on our analysis of the market configuration. This month, fundamental support provides further reasons to maintain this stance.
October offered a mixed picture following a bruising first three quarters. The Bloomberg Global Aggregate Index was down 0.55%, driven primarily by losses in US Treasuries. However, investors in some segments of the credit markets, especially EUR HY, USD HY and to a lesser extent EUR IG did see positive performance. Most Inflation-Linked Bonds markets with the exception of the US also rallied on persistently high inflation.
European equities have rebounded over the past four weeks. The rebound was mainly driven by value stocks that have outperformed growth stocks since the last Equity Committee.
September was another very challenging month for investors. The market is subject to considerable uncertainty, with no clear evidence of the next step.
European equities closed September lower. In Europe, the energy crisis continued to dominate the headlines, as Russia completely halted gas flows through the key Nord Stream 1 pipeline at the beginning of the month.
After registering losses in August, there was no reprieve for fixed income investors in September. All major asset classes posted negative returns, with the biggest falls coming in UK gilts.
While inflation continues to surprise to the upside, growth dynamics have turned and continue to decelerate. Growth concerns are mainly affecting Europe, as energy prices remain an important inflation driver, while central banks are stepping up their tightening.
After a respite in July, August saw negative performances across the board for almost all asset classes. In G10 rates, investors in Japan suffered the least (-0.97%), whilst the UK posted the largest losses (-6.36%), followed by EMU peripherals at –5.34%. EMU core markets fared somewhat better at -4.71%, but with a sizeable distance away from US government bonds at -2.73%. Breakevens were positive across the board, although barely so in the eurozone.
After a two-month period of improving risk appetite, the market started to head downwards in mid-August, influenced by the outcome of the Jackson Hole meeting. Jerome Powell’s hawkish tone obviously had a strong impact on the markets, but it was not the only strong driver. The deterioration of energy supply in Europe as we are quickly approaching winter is a cause for concern for industrial output, but also consumers, who will be facing record energy bills.
Central banks’ commitment to bringing inflation under control, despite the inherent risks to the growth outlook, shook both equity and bond markets in August. While the summer brought historical droughts and heatwaves to many parts of the world, the global economy nevertheless continued to cool. All in all, the level of uncertainty about the outlook for the global economy remains high. This uncertainty is especially elevated in Europe, where after six months of war in Ukraine, there is no sign of a ceasefire, and where a recession seems increasingly likely this winter as the region’s energy crisis continues to intensify.
This year’s European summer heatwave and drought has the potential to worsen the current energy crisis, as river water levels have dropped significantly.
June marked another month of strong volatility, with core rates moving sharply upwards over the first half, while the second half saw some respite, albeit in a fairly turbulent environment.
As the investment community was slowly preparing for a well-deserved summer break, a higher-than-expected US CPI read revived fears that a recession might be around the corner. Uncontrolled inflation is pushing central bankers to continue raising the cost of capital, as the Fed did at its June meeting.
Markets remain nervous, as investors perceive the Fed as being behind the curve in taking control over inflation. Rising prices are biting into consumer sentiment and savings, leading to decreasing growth expectations.
Global equity markets stabilised somewhat in May after the significant correction since the beginning of the year. However, there are not a lot of new elements to digest. The Fed walked the talk and increased its rates.
The performance of financial markets improved in May, with US markets posting a positive performance for the first time this year. Equities rebounded from their lows of May 19th and the greenback weakened while EUR/USD rebounded towards 1.07.
The multiple shocks experienced so far in 2022 have led to a rare simultaneous decline in equity and bond values. As uncomfortably high inflation leads major central banks to tighten monetary policies, investors are preparing for the landing of the global economy.
The reasons for a prudent allocation have not changed in recent weeks: facing high inflation, central bank rhetoric and policy tools have triggered a tightening in financial conditions while the global economic slowdown is now well underway, as the war in Ukraine and Covid-related lockdowns in China weigh on confidence and activity.
There are currently so many headwinds to the economy that it is difficult to isolate THE driver that is having the biggest impact on deteriorating economic fundamentals in only a small paragraph.
The first quarter of the year was difficult for investors and April proved no different. The war in Ukraine, lockdowns in China and the prospect of substantially tighter US monetary policy all weighed on sentiment.
Exiting the pandemic, entering the war and tightening monetary policies around the globe are acting together as a formidable business cycle accelerator.
