Global Asset Allocation Team Market Update – July 2022
The first half of 2022 wrapped up on a calamitous note, as mounting fears of recession stemming from central banks’ efforts to tackle decades-high inflation reverberated throughout financial markets. Both equity and fixed income markets have seen some notable weakness this year, leaving little place to hide as macroeconomic risks intensified.
Global equity markets saw a sharp pullback in June, with investor focus pivoting away from persistently elevated inflation and towards the deteriorating outlook for both the global economy and corporate earnings. The MSCI All Country World fell 9%, with steep losses recorded across all regional benchmarks. For 2022, the global benchmark is down 21% as asset prices fell victim to rapidly tightening monetary policy.
Fixed Income markets also generated negative results in June as global central banks signaled the need for more aggressive tightening to tame rampant cost pressures. Yield curves bear-flattened, with short-term interest rates rising by more than their longer-dated peers on speculation that policymakers may not be able to stave off a hard landing. The Federal Reserve is moving “expeditiously” to combat the hottest inflation in 40 years and raised interest rates by 75 basis points last month, while Chair Powell openly endorsed raising rates well into restrictive terrain – a strategy that has often resulted in an economic downturn. The Bank of Canada also continues to push forward on its expedited path to higher rates in order to prevent inflation from becoming embedded in expectations. With the economy moving into excess demand and inflation expectations building, the Bank of Canada has promised to deliver “forceful” action, including the possibility of an outsized 75 basis point move in July.
The U.S. dollar extended its unrelenting advance alongside the sharp rise in treasury yields and safe haven flows that have buttressed the greenback. By contrast, the yen has been on a steady decline, with the Bank of Japan the only major central bank that is pushing back against the global tightening campaign – while the Canadian dollar stumbled alongside the monthly slide in oil prices and a generally buoyant U.S. dollar.
In commodity markets, oil posted its first monthly decline since November as escalating fears over an economic slowdown overshadowed rapidly tightening energy markets. Gold declined for a third straight month as investors weighed the prospect for sharp rate hikes that will ultimately dampen the allure of the non-interest bearing metal, while copper tumbled to a 17-month low on growing fears about a global economic slowdown that has dampened the outlook for industrial metals demand.