Global Asset Allocation Team Market Update – August 2022
The mood in the market improved in July amid speculation that a slowing global economy will prompt central banks to pivot their focus and cool the scale of rate hikes to tame decades-high inflation, which sparked a rally in both stocks and bonds. Investors also cheered some better-than-feared U.S. earnings results that helped to dispel some of the worst recession fears and provided some reprieve for equity investors last month.
Global equity markets generated positive results in July as the environment of declining bond yields provided a tailwind for stocks. The MSCI All Country World advanced +6.9%, with developed markets (+7.9%) leading the charge and outperforming their emerging market peers (-0.7%). Regionally speaking, the S&P 500 gained +9.1%, while the S&P/TSX also generated positive performance (+4.4%) but underperformed its developed market peers given the monthly retreat in commodity prices. Looking abroad, international developed stocks gained +4.9%, while the emerging market benchmark bucked the global trend and declined for the month, owing mainly to a sharp decline in Chinese equities.
Fixed income markets also generated positive results as signs of softer economic activity spurred traders to rein-in their wagers for aggressive central bank tightening. The closely-monitored 10-2 year yield curve inverted, highlighting the growing fear among market participants that a recession may be on the horizon. The U.S. 10 year treasury yield fell by 36 basis points to 2.65% (a three-month low) and the 2 year treasury yield fell by 7 basis points to 2.88%. Similarly in Canada, the 10 year government bond yield fell by 61 basis points to 2.61%, while the 2 year yield fell by 13 basis points to 2.96. For the month, the Barclays US Aggregate bond index rose 2.4%, while the FTSE Canada Bond Universe gained 3.9%.
The US dollar strengthened in July, with the DXY index hitting a 20- year high. Gains in the US dollar were mainly visible against the euro, with the euro’s decline perpetuated by a weak European economy, unfavorable interest rate differentials as the European Central Bank lags the Federal Reserve in its tightening campaign, and Europe’s energy crisis.
In commodity markets, oil saw another volatile month marked by escalating concerns over a looming economic slowdown, with lingering growth fears largely overshadowing a squeeze of the physical oil market, in part due to upended trade flows from Russia. Gold also retreated. While high inflation and growth threats typically aid bullion, its haven status was sidelined by a persistently stronger greenback. Finally, copper tumbled lower as fears of a global recession weighed on the demand outlook for the metal seen as an economic bellwether due to its wide range of uses.