Equity markets: A bad semester, a bad quarter, a bad month of June
The first half of 2022 will go down in history as the worst in five decades. The war in Ukraine and the risks to Europe's energy supply, rising inflation and the consequences for monetary policy, and the slowdown in growth in China due to the persistent zerocovid policy were the topics that worried the markets. The uncertainty surrounding these themes caused significant daily price fluctuations, both downward and upward. All sectors had a negative performance in the year's first half, except for energy.
The negative trend continued in June. The past month was dominated by the drastic measures taken by the central banks to keep inflation under control. Each published economic figure has been interpreted in terms of its significance for monetary policy.
Geographically, the US stock market did less in local currency than the European market in June, but thanks to the dollar rise, the European stock market was still the weakest performer in euro terms. Latin American stock markets were underperformers due to falling commodity prices. Asian emerging markets did relatively well, with the Chinese stock market even posting a positive performance over the month thanks to the improving covid situation. In the US, value and growth shares performed fairly similarly, while in Europe, growth shares did slightly better, possibly reflecting the changed interest rate trend.
|MSCI EMU NR||-9.2%||-10.5%||-18.7%||-13.8%|
|MSCI EUROPE NR||-7.7%||-9.0%||-13.8%||-6.5%|
|MSCI USA NR||-6.1%||-11.5%||-14.4%||-1.5%|
|MSCI JAPAN NR||-5.6%||-9.1%||-13.3%||-9.2%|
|MSCI EM. MARKETS NR||-4.3%||-5.8%||-10.4%||-15.2%|
|MSCI AC WORLD NR||-6.2%||-10.2%||-13.2%||-4.4%|
Bond markets: sharply higher interest rates in the first half, a turning point in June?
Bond yields have made a massive move in the past six months. Barely six months ago, the German 10-year yield was still at -0.18% compared to 1.75% in mid-June. US ten-year yields rose from 1.5% to 3.5% in the same period.
In the first half of June, the upward trend in interest rates continued, but then rates fell sharply (to just 3% in the US and 1.35% in Germany). It is likely not a coincidence that this reversal coincided with the announcement by the Federal Reserve of a larger-than-expected interest rate increase. Investors became more aware of the scenario of too much tightening of monetary policy and the increased risk of recession.
In the eurozone, bond spreads for the southern eurozone countries continued their upward trend at an accelerated pace. The Italian bond spread widened to almost 250 basis points in mid-June from 100 basis points a year ago. At an additional meeting, the ECB was able to calm tensions, causing spreads to return to levels seen at the beginning of the month.
The euro's corporate bond spreads (both investment grade and high yield) have widened considerably over the past six months. Whereas the first quarter was primarily an expression of investor risk aversion due to the start of the war in Ukraine, the second quarter was mainly the more challenging environment for companies due to higher operating and financing costs and uncertain economic growth. In June, this trend of higher spreads accelerated.
Central banks: monetary policy dominates markets
The Federal Reserve has raised its key interest rate by 0.75% as expected, the most significant rate hike in the US since 1994. Following this increase, short-term interest rates are now increasing from 1.50% to 1.75%. The Fed strongly pledged that the central bank is "determined to bring inflation back to its 2% target" along with the sharp rate hike.
In mid-June, the Swiss central bank surprised with an interest rate increase (for the first time in 15 years) of 50 basis points. Markets expected the SNB to follow the ECB's moves. Even though inflation is currently very subdued ('only' 2.9%), the SNB shows a willingness to act to contain inflation risks. As expected, the Swedish central bank raised its interest rate by 50 basis points to 0.75%. This cycle is the third rate hike, and more hikes are expected. The Bank of England implemented the fifth interest rate increase in the UK since December.
As expected, the European Central Bank announced a rate increase in July, possibly by 50 basis points, and the end of the bond-buying program on 1 July. Due to the increasing bond spreads of the southern eurozone countries, the ECB held an unscheduled meeting. It was decided to apply some flexibility to the reinvestment of maturing bonds on the ECB's balance sheet. This means that, for example, maturing bonds of northern countries can be reinvested in Italian bonds. In addition, it was decided to finalize the development of a new anti-fragmentation instrument as a matter of urgency.
|Fed funds||1.5-1.75%||+0.75%||June 2022|
|ECB deposit rate||-0.50%||-0.10%||Dec. 2021|
Currencies: Swiss franc at parity with euro
The euro's recovery in May was short-lived and completely wiped out in June. The increased risks of a recession in the eurozone have weighed on the currency.
The Swiss franc rose past parity with the euro in June, with the Swiss central bank's surprise interest rate hike as a catalyst. It is the first time since early 2015 that the Swiss currency had matched the euro when the SNB unexpectedly decided to loosen its peg with the euro.
The Japanese yen continued to weaken. Against the USD, the yen reached its lowest level in several decades. The yen's decline against the dollar remains largely a function of the policy differences between the central banks in the two countries, with the Bank of Japan maintaining its accommodative monetary policy by setting the 10-year rate close to 0%.
Commodities: growing fear of recession pushes down prices
Commodity prices generally moved lower in the past month. This is due to the heightened risk of recession because of (the prospect of) higher interest rates. The impact was most visible in the prices of industrial metals, which fell more than 10% (in dollar terms) in June. Prices of copper, aluminium, zinc and nickel fell between 10% and 20% over the month, despite stabilizing economic activity in China. Consequently, commodities moved into negative territory since the beginning of the year.
The fear of recession - and the resulting lower demand - was also felt in the oil price, albeit to a lesser extent. The price fluctuated between USD 110 and 125 per barrel and remains close to its recent highs. At the beginning of the month, OPEC increased its production (to 650,000 barrels per day) more than expected (400,000 barrels) according to the normalization path after the covid pandemic. In practice, however, OPEC+ produces less than the production target allows. Indeed, it would appear that some countries, including Saudi Arabia, have little or no spare production capacity. The European gas price rose sharply after two stable months due to new reductions in gas supplies to Europe by Russia.
The price of gold fell somewhat but remained above USD 1,800 per ounce. Real interest rates rose further (with them the opportunity cost of holding gold), but this has had little impact because the geopolitical risks remain present.