Monthly Market Review: 10 Highlights

After a very difficult first half of 2022 for the financial markets, stocks, bonds and cryptocurrencies rebounded significantly in July. Here are ten stories to remember from the stunning start to summer.

Charles-Henri Monchaux, IT Director, and Valerie Noel, Head of Commerce

1 – “Technical” recession?

Charles-Henri MonchauxIn a few weeks, investors’ fears changed. They now focus more on the “R” of recession rather than the “R” of “rates” (interest rates). Flattening bond curves, collapse of confidence surveys and GDP figures 2thousand quarter (published in July) portends a very noticeable slowdown in the world economy.

The United States is also officially in a technical recession after two quarters of negative GDP growth. After falling 1.6% in the first three months of the year, US GDP fell an annualized 0.9% in the second quarter as inventories and housing investment weighed on growth.

2022.08.02.  US GDP
US GDP falls in the second quarter due to a drop in demand
Source: Bloomberg, BEA

In Europe, Germany is in stagflation (see next point), while the rest of the continent has exceeded growth forecasts. Both Spain and Italy reported growth of 1% or more in the second quarter, avoiding (so far) a technical recession. However, the culmination of the energy crisis, which will come this winter, portends difficult conditions for the entire European continent.

2 – Inflation reaches record levels

Despite very clear signs of a slowdown in the world economy, inflation rates continue to break records in most developed countries. In the USA, inflation reached 9.1% in June – the highest level in 4 decades. Europe is also recording record inflation rates, in particular due to a sharp rise in energy prices and a rise in imported goods and services following the weakening of the euro. Germany is experiencing a situation of “stagflation”: in 2022, the consensus expects very weak GDP growth (+1.5%) and a very high level of inflation (7.6%).

2022.08.02.  German inflation
Consensus forecast of real GDP growth and inflation in Germany in 2022
Source: Bloomberg

3 – the tightening of monetary policy continues

As part of its ongoing efforts to curb inflation, the US Federal Reserve raised its key rate by 75 basis points on the last Wednesday of the month, now in a range of 2.25% to 2.50%. This is the second consecutive 0.75% interest rate hike by the Fed and the fourth rate hike since the beginning of the year. Countries whose currency is pegged to the dollar (example: Saudi Arabia) followed suit.

The movement to tighten monetary policy has gained a global scale. After the Bank of England, the Fed and the National Bank of Ukraine, it is the turn of the European Central Bank (ECB) to join the “club” of central banks that raise rates. This first increase since 2011 was even higher than expected, with an increase of 50 basis points against the 25 basis points originally planned.

Among the major central banks, Japan is the only one that pursues an expansionary monetary policy.

2022.08.02.  Central Bank courses
Interest rates of various central banks
Source: Charlie Bilello

4 – Expectations for profit growth have been revised downwards

One of the few “highlights” of the first half of this year was the stability of corporate earnings and the consensus upward revision of earnings growth expectations – despite challenging macroeconomic and geopolitical circumstances.

But now that island of stability appears to be in jeopardy, as earnings growth expectations for S&P 500 companies are currently facing their most severe downward revisions since the 2020 Covid crisis.

It should be noted that these negative reviews are much stricter in the United States than in Europe or Japan. The reason: the strength of the dollar, which accounts for about 40% of the combined revenue of US companies. On the other hand, the rise of the dollar is a boost for European and Japanese companies, as the United States accounts for 24% and 15% of their sales, respectively.

08/02/2022 Review of the beneficiary's estimate
The ratio of downgrades to upside revisions is the highest since 2020
Source: Bloomberg

5 – “Recovery” of stock markets

After a very poor first half of the year for stock markets, the major US and European indices recorded their best monthly July performance since November 2020. In the United States, the Nasdaq rose 12.5%, while the S&P 500 recorded gains. an increase of 9.3%.

How to explain this recovery, despite recession fears, record inflation rates, multiple rate hikes by central banks and downward revisions to income growth expectations?

Investors now seem to view the accumulation of bad news as good news for the markets. In other words, a very sharp slowdown in the global economy could force central bankers to step up and force them to end monetary policy tightening very soon.

It should be noted that the effectiveness of the “growth” style compared to the “value” style occurs simultaneously with the fall in bond yields.

2022.08.02.  The efficiency of the stock market
Monthly indicators of US index principles
Source: Bloomberg

6 – Lower bond yields and smaller credit spreads

Despite interest rate hikes by most central banks, bond markets performed very well in July. Fears of a recession or a sharp slowdown in the global economy caused the entire US Treasury yield curve to decline during the month. The middle end (39 basis points decline in 7-year yields) outperformed both the short end (7 basis points decline over 2 years) and the long end (19 basis points decline over 30 years).

Investors’ return to risky assets led to a narrowing of credit spreads. The Investment Grade bond index (in USD) gained 4.2% for the month, while the High Yield (USD) index recorded a performance of 6.3%. The JP Morgan bond index of developing countries in US dollars rose by 3.1%. Emerging market local currency bonds, on the other hand, were marginally lower on dollar strength and investor caution in the segment following Sri Lanka’s default.

In Europe, the political crisis in Italy led to widening spreads between Italian bond yields and the German Bund.

2022.08.02.  Maturity of US government bonds
Evolution of various US Treasury maturities during the month
Source: Bloomberg, www.zerohedge.com

7 – An exceptional month for “multi-management”

The first half of 2022 turned out to be the worst in history for the so-called “60/40” portfolio, that is, 60% invested in US stocks and 40% in dollar bonds. The resurgence of the stock and bond markets in July led to impressive results for this type of portfolio. Actually, it’s 2thousand the best monthly progress since March 2000 with an increase of 11.2% (best figures date to April 2020). Note that despite this impressive rebound, the year-to-date performance of the 60/40 portfolio (-10.7%) is still the worst ever (at this point in the year). Globally, the market capitalization of the stock and bond markets increased by $7 trillion in the last two weeks of the month.

2022.08.02.  Multiportfolio efficiency
Combined monthly indicators of the US stock and bond markets
Source: Bloomberg, www.zerohedge.com

8 – Very strong correction of goods

Between March 2020 (short low) and March 2022, the commodity market experienced a strong bull market, with the commodity index tripling in value during this period. In the period from March to June this year, the asset class entered a consolidation phase under the influence of the tightening of the monetary policy of central banks and the rise of the dollar. But over the past few weeks, investors have been worried that the withdrawal of liquidity will have a sharp impact on future demand for commodities, prompting a sharp correction in the S&P GSCI commodity index. Industrial metals and agricultural goods fell in price the most.

However, oil remains the best-performing asset year-to-date, up 31%.

However, the good news is that lower commodity prices should reduce inflationary pressures in the coming months.

2022.08.02.  Raw material prices
Goods returned to the same level as before the invasion of Ukraine
Source: businessinsider.com, Bloomberg

9 – Foreign exchange market: a month of parity for the euro

In July, the euro continued to weaken against the dollar, as well as against the Swiss franc. The single currency is now trading below parity against the Swiss franc (around 0.97 at the end of the month), despite the ECB rate hike. The euro briefly touched parity against the dollar before strengthening slightly at the end of the month.

There are many reasons for the weakness of the euro: Italian politics (the resignation of Mario Draghi), the positioning of the market, which seems to have not yet taken into account all the bad news, but also, above all, the high risks of recession related to the current energy crisis. Russian President Vladimir Putin uses natural gas exports to Europe as an economic weapon. The sharp drop in energy exports to Europe is causing gas prices to skyrocket, as well as electricity prices, which are soaring across Europe even though we’re in the middle of summer. Record prices this winter will lead to rationing of electricity with an impact on productive tools, plunging the European economy into recession with negative consequences for the euro.

2022.08.02 Forex market
Natural gas futures expire in August 2022
Source: The Daily Shot

10 – Bitcoin’s best month since January 2021

The risk asset resurgence also includes cryptocurrencies, whose total market capitalization has well surpassed a trillion dollars.

Bitcoin is up about 28% in July after reaching $24,000 at the end of the month. Since the beginning of the year, it has decreased by 48%.

As for Ether, it is once again trading around $1,700 and has recorded gains of more than 70% in July. Ether’s rebound is even 100% from the June low, while the Ethereum blockchain will soon change mode with an event called the “Merger.”

It should be noted that both Bitcoin and Ether benefited from mass liquidations of “short” positions at the end of the month, which caused forced buying by speculators who were on the decline.

2022.08.02.Bitcoin
Indicators of some cryptocurrencies in July
Source: Bloomberg, www.zerohedge.com

A great end to the summer!