By Haith Nori
June has been another chaotic month for most asset classes. Central Banks are taking aggressive action to control inflation. The Ukraine Crisis has entered its fifth month presenting further global issues. Russia has taken control of Ukraine’s major ports or has hemmed in by its naval blockade (Ukraine is a critical global producer of wheat) which could lead to a serious impact on global hunger. In China, after the good news of lifting Covid restrictions, and markets factoring in the positive news, further lockdowns were introduced under its zero Covid policy as cases accelerated once again.
Inflation remains a hot topic for global central banks which, in June, have begun to take more aggressive action in raising interest rates. After the US May Inflation data – the single most important data point for the global economy (released on 10th June) – delivered a headline number of 8.6%, markets immediately factored in an expected 50 basis point rise in interest rates by the US Federal Reserve. In the end markets were surprised with a more aggressive increase of 75 basis points at the Federal Open Market Committee (FOMC) meeting on June 15th, with Chair Powell stating;
“The Committee is strongly committed to returning inflation to its 2 percent objective” [i]
This suggests the path of interest rate hikes in the US might have further to run, along with the expectation that inflation must be bought under control. However, this may come with a nasty side effect – The slowing of the US economy along with the potential for a higher unemployment rate.
After an initial recovery, which was sadly short lived, US equity markets declined significantly the following day, falling more than 3%. The Swiss National Bank also went on to surprise markets with a 50bps increase in interest rates (the first in 15 years) from -0.75% to -0.25%. Here in the UK, on 16th June the Bank of England (BoE) also took action to raise interest rates for the fifth time since December 2021 by another 25 basis points up to 1.25%, the highest level seen in 13 years. The FTSE 100 also fell following this news.
On the 9th of June Christine Lagarde, President of the European Central Bank (ECB), after months of suggesting an increase in interest rates, finally announced a plan to tackle the ever-growing issue of European Inflation. Currently it is engaged in Corporate-Bond buying which Lagarde has now stated will end on July 1st – a €3 Trillion bond-buying programme. Also, the ECB will begin to combat inflation by raising interest rates by a suggested 25 basis points later that month, ‘the first interest rate hike since 2011 followed by a potentially larger move in September’[ii] which may be as high as 50 basis points. With inflation in Europe currently at c.8.1% (and still rising), the ECB needs to take drastic action in order to achieve their 2% target.
Over in Japan the Bank of Japan (BoJ) on 17th June decided to maintain ultra-low interest rates and ‘vowed to defend its cap on bond yields with unlimited buying, bucking a global wave of monetary tightening in a show of resolve to focus on supporting a tepid economic recovery’[iii].
The Japanese Yen has historically been considered a ‘safe haven’ within the investment community. However, over the past few years the price has depreciated very significantly against major currency crosses given a monetary policy stance which stands in stark contrast to that of other developed market peers. Since its highest point in January 2021 the Yen has depreciated by 31.4% against the US Dollar, reaching its lowest level since 1970.
Global equity markets showed signs of a rally later in the month as the G7 Summit took place in Germany over the 26th-28th June. Markets are factoring the hope that some resolution may come of the G7 Summit with Global leaders, for instance trying to find alternative overground routes for grain exports. The S&P 500 had its largest one-day percentage gain in more than two years on Friday 24th June.
China’s escape from lockdown was short lived at the start of the month as, due to their zero-tolerance policy, new lockdowns were once again imposed. China remains unpredictable as June data does not ‘show the powerhouse bounce-back most expected, perhaps reflecting the view that corporates do not see their Covid Zero nightmare as over’[iv]. We can not rule out the end of Covid Lockdowns which will continue to exert an impact on global markets. Perhaps counterintuitively, Chinese equities are in a bull market, with the Shanghai Shenzhen CSI 300 Index having risen from its low point 26th April of 3784.12 to 4486.08 at the end of June– up 18.6%!
To conclude, the S&P 500 started the month at 4101.23 and fell by 7.7% to end the month at 3785.38. The FTSE 100 also gave back some of its more recent relative gains, having entered June at 7532.95 while going on to close at 7169.28, a reduction of 4.8%. In Germany, the DAX opened the month at 14,340.47 and finished at 12,783.77, a fall of 10.86%. The French CAC40 Index fell from 6418.89 to 5922.86, a reduction of 7.7%. The Italian MIB fell from 24,283.56 to 21,293.86, a decline of 12.3%. Japan’s Nikkei 225 fell from 27,457.89 at the beginning of June to also end lower at 26393.04, a decline of 3.9% during the month. Brent Crude, having rose to highs of $123.58 during June, started the month at $116.29 ending at $114.81.
Overall, it has been an extremely volatile month for many asset classes, especially equities. The best performers remain companies with sufficient pricing power to avoid suffering from inflation. Healthcare, Consumer Staples and utilities were the best performing sectors through June. Both the effects of Covid restrictions and the Ukraine Invasion are still very much having an impact on global markets. Central Banks are acting much more aggressively in trying to combat the overall cost of living and inflation.
Finally, US stocks have capped off their worst first half year performance since 1970.
[i] Bloomberg Points of Return – Be Warned – So Now we have Clarity. The World has Changed
[ii] https://www.reuters.com/markets/europe/ecb-chart-course-out-stimulus-setting-stage-rate-hikes-2022-06-08/
[iii] https://www.reuters.com/markets/currencies/boj-maintain-ultra-low-rates-sound-warning-over-weak-yen-2022-06-16/
[iv] Bloomberg Points of Return – Be Warned – Gaming the Post-Peak Rates World Is No Easy Task
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