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Archinomics Monthly - June 2022

5 months ago

the
MARKETS

Equities

Global equities slumped (MSCI World Index -8.8%) on fears that a period of negative growth may be needed to tame inflation, particularly in the US and Europe. US stocks tumbled: the 8.4% monthly drop in the S&P 500 index took it into a bear market, while the tech-heavy Nasdaq is now down more than 30% from its peak in late 2021. European stocks also plunged (EuroStoxx 50 Index -8.8%), although the UK’s FTSE 100 Index held up relatively well (-5.8%). Chinese equities were a rare bright spot: the CSI 300 Index rallied 9.6%, its strongest monthly gain in two years, helped by the lifting of lockdowns in Shanghai and Beijing, improving economic data and signs that the regulatory crackdown on internet companies may be easing.

Bonds

Global bonds closed a volatile month with negative returns. In mid-June, the yield on the 10-year US Treasury came within touching distance of 3.5%, its highest level in 11 years, while the 10-year German Bund yield hit an eight-and-a-half year high of 1.9% as hotter than expected inflation caused central banks to ramp up their hawkish stance. While growing fears of a recession caused yields to decline in the second half of June, global bonds still closed the month with negative returns (10-year US Treasury -1.0%; 10-year German Bund -1.8%). Corporate bonds declined even more, with spreads over sovereign debt widening as the economic outlook deteriorated, while high yield bonds fared the worst.

Currencies

The US dollar strengthened over June following the Fed’s larger than expected increase in interest rates. The euro also appreciated against the British pound and Japanese yen, as the European Central Bank finally abandoned its dovish stance.

Commodities

Commodity prices generally eased, undermined by fears that a recession would decrease demand. Oil prices fell 6.5% to $114.80 a barrel (Brent crude). Many industrial metals prices ended the month lower, with copper touching the lowest level since early 2021, while wheat prices retreated to pre-invasion levels. 

Market Volatility

Market volatility

Volatility increased over June amid growing fears of a recession. The Vix index rose 9.6% over the month to close at 28.7.

Responsible investing

President Joe Biden’s hopes of fighting climate change were dealt a blow when the US Supreme Court constrained the Environmental Protection Agency’s ability to limit greenhouse gas emissions from power plants. The president now needs to get agreement from both Congress and the House of Representatives if he wants to introduce regulations to reduce emissions.

IN
BRIEF

The US Federal Reserve (Fed) raised interest rates by 75 basis points in June, its largest single increase since 1994, and indicated that another substantial rate hike would likely be needed in July. With further rate rises expected throughout 2022 and 2023, Fed Chair Jay Powell warned that “some economic pain” would be needed to bring inflation under control.


The European Central Bank (ECB) finally abandoned its dovish stance, signalling it would likely raise rates by 25 basis points in July once it had finished its bond buying programme. Hinting that it would implement more aggressive rate rises later in the year, the ECB suggested that borrowing costs may be above zero by the end of September.


Several other developed market central banks also increased rates, including the UK and Australia, although Japan stood out as the exception as it reaffirmed its dovish stance. China also remained accommodative, although many emerging market central banks continued to tighten monetary policy.


What?

on the
RADAR

Hopes that inflation may have peaked in May were dashed when headline US CPI rose to a fresh 40 year high of 8.6%. While there are signs that inflationary pressures may now be easing in the US, European inflationary pressures are likely to continue to accelerate until at least the autumn.


US economic activity appears to be slowing as higher inflation impacts household spending. The University of Michigan’s consumer sentiment index fell to a record low in June and there is a growing belief that a short recession will be needed to bring inflation back to target levels.


In Europe, energy supply remains a key unknown. Russia has already ceased supplying gas to the Netherlands, Denmark, Poland, Bulgaria and Finland after they refused to pay in roubles. During June, Russia cut the flow of gas through the Nord Steam 1 pipleine by 60%, hindering the ability of European countries to build up their gas reserves ahead of winter.

 

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