Recession Risks Inflate Investors’ Concerns
Data in June has highlighted heightened inflationary pressures. Central bank rhetoric in western developed economies has evolved into a greater determination to arrest inflation through tighter monetary policy via higher short-term interest rates.
Financial markets have looked past inflation to the impact of a tougher stance on monetary policy: the greater likelihood of recession. That is looking hard to avoid in Europe and the UK but the jury is still out in the US albeit more likely than last month.
As Bloomberg eloquently puts it, ‘the Fed is hoping to engineer a touchdown that doesn’t smash the landing gear.’
US stocks had the worst first half of a year since 1962. The following chart compares 1962 and 2022 S&P500 index movements.
For those interested in how the second half went sixty years ago, the S&P was up 15% from July to December 1962. For further context, the US S&P 500 Index is back to where it was in March 2021.
European stocks fared relatively ‘better’, the sell-off was the worst since 2008, as the following chart sourced from Bloomberg illustrates.
In Asia, the two largest economies are pursuing quite different policies. Despite rising inflation, Japan refuses to change its accommodative stance and China has become economically stimulative. Chinese equities were the bright spot in a negative month for stocks. The staple food in Asia is rice for which there are no shortage or supply constraints as there are for wheat, corn and barley. While China is committed to a zero tolerance Covid-19 policy, infections are falling in the major cities. Consequently, Chinese equities were a positive outcrop in a sea of negative returns across most asset classes.
Thematically, preferred long-term demand themes provided little to no respite from June’s sell-off in risk assets. Healthcare provided a positive outcome in June though.
Debt
Bond markets caught a bid in the final stretch of June as fears of recession led to investor demand for safe havens devouring government bonds. Despite the strong end to the month, bond prices were lower over the month as a whole. Credit markets remained under pressure, not least mortgages.
Commodities
The increased risk of recessions did no favours for commodity prices. With the prospect of lower demand, after a strong year to May, June saw most commodity prices significantly softer. A lower oil price ensued in June giving some respite after earlier months of higher prices while gold was a mild positive exhibiting some of is safe haven characteristics.
Currencies
Gold, used by ourselves as an alternative currency, benefited from greater levels of uncertainty which also created a favourable backdrop for the US dollar. The US currency also benefited from looking less challenged than its UK, European and Japanese counterparts. Alternative currencies such as bitcoin fared worse as the digital currency plummeted by a third.