General | Jul 7, 2022
The first half of 2022 ended on a disastrous note, as growing fears of recession stemming from central bankers’ efforts to tackle high inflation for decades spilled over into financial markets. Equity and fixed income markets have experienced notable weakness this year, leaving little room to hide as macro risks escalated.
Global equity markets fell sharply in June as investors’ attention shifted away from persistently high inflation and towards deteriorating prospects for 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 rapid monetary policy tightening.
Fixed income markets also generated negative results in June as global central banks signaled the need for more aggressive tightening to rein in creeping cost pressures. Yield curves flattened, with short-term interest rates rising more than their longer-term counterparts on speculation that policymakers may not be able to avoid a hard landing. The Federal Reserve is moving ‘quickly’ to tackle the highest inflation in 40 years and raised interest rates by 75 basis points last month, while President Powell openly endorsed a rate hike well in restrictive terrain – a strategy that has often resulted in an economic downturn. The Bank of Canada also continues to pursue its accelerated path to higher rates to keep inflation from catching up with expectations. As the economy moves towards excess demand and inflation expectations strengthen, the Bank of Canada has promised to take “strong” action, including the possibility of an outsized 75 basis point move in July. .
The US dollar extended its relentless advance alongside the sharp rise in Treasury yields and safe-haven flows that supported the greenback. By contrast, the yen has seen a steady decline, with the Bank of Japan the only major central bank to push back on the global tightening campaign – while the Canadian dollar stumbled alongside the monthly drop in oil prices and a US dollar usually dynamic. .
In commodity markets, oil recorded its first monthly decline since November as growing fears of an economic slowdown overshadowed the rapid tightening in energy markets. Gold fell for a third consecutive month as investors weighed the prospect of sharp rate hikes that will eventually dampen the appeal of the non-interest-bearing metal, while copper fell to a 17-month low due to Growing fears of a global economic slowdown have dampened the outlook for demand for industrial metals.