After a very complicated first half of 2022 for the financial markets, stocks, bonds and cryptocurrencies rebounded strongly in July. Here are ten stories to remember from a stunning start to summer.
By Charles-Henry Monchau, CIO, and Valérie Noël, Head of Trading
1 – A “technical” recession?
In the space of a few weeks, investors’ fears changed. They now focus more on the “R” of recession rather than the “R” of “rates” (interest rates). The flattening of bond curves, the collapse of confidence surveys and the GDP figures of the 2th quarter (published in July) augurs a very marked slowdown in the global economy.
The United States is also officially in a technical recession after two quarters of negative GDP growth. After falling 1.6% in the first three months of the year, US GDP fell at an annualized rate of 0.9% in the second quarter, as inventories and residential investment contributed negatively to growth .
In Europe, Germany is in “stagflation” (see next point) while the rest of the continent has exceeded growth forecasts. Spain and Italy both reported growth of 1% or more in the second quarter, escaping (for now) the technical recession. The climax of the energy crisis to come this winter, however, portends complicated quarters for the whole of the European continent.
2 – Inflation reaches record levels
Despite the very clear signals of a slowdown in the global economy, inflation rates continue to break records in most developed countries. In the United States, inflation reached 9.1% in June, the highest level in 4 decades. Europe is also recording record inflation rates due in particular to the explosion in energy costs and the rise in imported products and services following the weakening of the euro. Germany is facing a situation of “stagflation”: for the year 2022, the consensus now expects very weak GDP growth (+1.5%) and a very high inflation rate (7.6%).
3 – Monetary tightening continues
As part of its ongoing efforts to curb inflation, the US Federal Reserve on the last Wednesday of the month raised its key rate by 75 basis points, which is now in a range of 2.25 to 2.50%. This is the second consecutive 0.75% increase in interest rates from the Fed and the fourth rate hike since the start of the year. Countries whose currency is pegged to the dollar (example: Saudi Arabia) followed suit.
The monetary tightening movement has taken on a global dimension. After the Bank of England, the Fed and the SNB, it is the turn of the European Central Bank (ECB) to join the “club” of central banks carrying out rate hikes. This first tightening since 2011 even turned out to be higher than expected with an increase of 50 basis points versus 25 basis points initially planned.
Among the major central banks, that of Japan is the only one to maintain an expansive monetary policy.
4 – Earnings growth expectations are revised down
One of the few “highlights” of the first half of this year was the resilience of corporate earnings and the consensus upward revision of earnings growth expectations – despite a difficult macroeconomic and geopolitical backdrop. complicated.
But this island of stability now appears to be under threat as earnings growth expectations for companies that make up the S&P 500 are currently facing the most severe rate of negative revisions since the 2020 covid crisis.
It should be noted that these negative revisions are much more severe in the United States than in Europe or Japan. The reason: the strength of the dollar, which weighs on approximately 40% of the aggregate income of American companies. On the other hand, the rise of the greenback is a boost for European and Japanese companies, since respectively 24% and 15% of their sales come from the United States.
5 – The “recovery” of the equity markets
After the very poor first part of the year for the equity markets, the main American and European indices recorded their best monthly performance in July since November 2020. In the United States, the Nasdaq rose by 12.5% while the S&P 500 recorded a gain of 9.3%.
How to explain such a rebound despite fears of recession, record inflation rates, multiple rate hikes by central banks and the downward revision of earnings growth expectations?
Investors now seem to view the accumulation of bad news as good news for the markets. In other words, the very sharp slowdown in the global economy could force the hand of central bankers and lead them to put an end to monetary tightening very soon.
It should be noted that the outperformance of the “growth” style compared to the “value” style occurs concomitantly with that of the fall in bond yields.
6 – Lower bond yields and tighter credit spreads
Despite interest rate hikes by most central banks, the bond markets recorded a very good performance in July. Fears of a recession or a sharp slowdown in the global economy caused the entire US Treasury yield curve to decline during the month. The middle part (39 basis point drop in the 7-year yield) outperformed both the short end (7 basis point drop in the 2-year) and the long end (19 basis point drop in the 30-year).
The return of investors to risky assets led to a tightening of credit spreads. The “Investment Grade” bond index (in USD) rose by 4.2% over the month, while the “High Yield” index (in USD) recorded a performance of 6.3%. The JP Morgan index of bonds from emerging countries in USD rose by 3.1%. On the other hand, emerging bonds in local currency posted a slight decline due to the strength of the dollar and the cautiousness of investors in this segment after Sri Lanka’s default.
In Europe, the political crisis in Italy caused spreads to widen between Italian bond yields and the German bund.
7 – An exceptional month for “multimanagement”
The first half of 2022 turned out to be the worst in history for a so-called “60/40” portfolio, i.e. invested 60% in US equities and 40% in dollar bonds. The rebound in equity and bond markets in July generated a spectacular performance for this type of portfolio. In fact, it is the 2th best monthly progression since March 2000 with a gain of 11.2% (the best performance dates from April 2020). Note that despite this spectacular rebound, the performance of a 60/40 portfolio since the start of the year (-10.7%) is still the worst in history (at this precise moment of the year). Globally, the market capitalization of equity and bond markets appreciated by $7 trillion in the last two weeks of the month.
8 – Very strong correction in commodities
Commodities experienced a formidable bull market between March 2020 (covid trough) and March 2022, with the “commodities” index having seen its value triple over the period. Between March and June of this year, the asset class entered a consolidation phase under the effect of monetary tightening by central banks and the rise of the dollar. But for the past few weeks, investors have now feared that the withdrawal of liquidity will have drastic effects on future demand for commodities, which has triggered a sharp correction in the S&P GSCI Commodities Index. Industrial metals and agricultural commodities posted the largest declines.
However, oil remains the best performing asset since the beginning of the year with an increase of 31%.
Good news, however: lower commodity prices should result in less inflationary pressure in the coming months.
9 – Currency market: the month of parity for the euro
The euro continued to weaken against the dollar but also against the Swiss franc in July. The single currency is now trading below parity against the Swiss franc (around 0.97 at the end of the month) despite the ECB’s rate hike. The euro briefly touched parity against the dollar before firming up slightly at the end of the month.
There are many reasons for the weakness of the euro: Italian politics (resignation of Mario Draghi), the positioning of the market which does not seem to have yet integrated all the bad news but also and above all the high risks of recession linked to the current energy crisis. Russian President Vladimir Putin is using natural gas exports to Europe as an economic weapon. The drastic drop in energy exports to Europe is causing gas prices to explode but also electricity prices, which are rising sharply throughout Europe even though we are in the middle of summer. Record prices this winter would lead to electricity rationing with impacts on productive tools, which would plunge the European economy into recession with negative consequences for the euro.
10 – Bitcoin records its best month since January 2021
The rebound in risky assets also includes that of cryptocurrencies, whose total market capitalization has risen very clearly above the trillion dollars.
Bitcoin is up around 28% in July after hitting $24,000 at the very end of the month. It remains down 48% since the start of the year.
As for ether, it is again trading around $1,700 and recorded an increase of more than 70% in July. The rebound of ether is even 100% since the low of June while the Ethereum blockchain will soon change its mode of operation with the event called “The Merge”.
It should be noted that bitcoin and ether both benefited from massive liquidations of “short” positions at the end of the month, which generated forced purchases by speculators positioned on the downside.
Beautiful end of summer!
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