Market Update July Monday 18th 2022
Further inflationary pressures drive the US dollar higher and markets down
The US dollar continued its ascent this week as US consumer price inflation hit 9.1% for the month of June, raising expectations for yet another 0.75% interest rate rise. Yield curve inversion in the US widened to its greatest level since 2007 as the yield on 2-year US Treasuries rose, whilst 10-year yields fell as markets priced in greater odds of an impending recession. Commodity prices also fell in anticipation of falling levels of demand.
As of 12pm on Friday, London time, US equities fell 2.8% over the week, whilst the US technology sector shed a further 3.3%. European stocks fell 1.8%, whilst the UK market dropped 1.3% with both large and mid-cap companies bearing the pain. The Japanese market rose 0.3%, however, the Yen continued to weaken, cancelling out any gains for international investors, whilst Australian equities fell 1.1%. Emerging markets lost 3.4%, with Latin America suffering most of the pain from a stronger dollar and weaker commodity prices as the continent’s stock markets fell by 6.4% in aggregate whilst Asia Pacific dropped by 3.0%.
US Yield curve inversion as markets price in a higher probability of recession risk
10-year US Treasury yields fell to 2.93% as investors started to price in the US Federal Reserve cutting rates in the face of a recession, whilst the yield on 2-year Treasuries rose to 3.12%. 10-year yields on both German bunds and UK gilts also fell to 1.16% and 2.09% respectively. The US dollar strengthened by 1.8% versus Sterling, taking the exchange rate to $1.183 and by 1.4% versus the Euro, with the Euro/Dollar exchange rate hitting parity on Thursday, before settling at $1.005.
Commodity prices tumble in anticipation of demand destruction
Gold proved to be no haven asset over the week falling by just over 2%, now trading at $1,704 an ounce in anticipation of further US rate rises. Brent crude dropped by 5.3%, priced at $101.3 a barrel, however on Thursday it fell as low as $94.8 a barrel, a level last seen prior to the Russian invasion of Ukraine. Copper fell by 8.2%, currently trading at $7,160 a tonne, whilst iron ore tumbled by almost 15%.
Chinese slowdown continues against the background of a zero Covid policy
News that the Chinese economy only expanded by 0.4% in the three months to June added further gloom, against economists’ forecasts of 1.2%. China has begun to ease financial conditions against a slowing economy, however, whilst the country persists with its aggressive zero covid policy, consumer confidence remains at rock bottom, with many reluctant to spend money on big-ticket items.
However, the upcoming Chinese elections provides hope for a better outlook
Investors still have positive hopes for the Chinese economy this year, with the twentieth National Congress of the Chinese Communist Party being held in November which will elect the decision makers for the following five years. The current leadership are unlikely to want a weak economy and rising unemployment going into this. The main barrier to a return of full economic activity is the relative ineffectiveness of China’s covid vaccines versus the West, with research suggesting that three jabs are required to prevent severe infections or death. Currently, only about two-thirds of the over-sixties population have had three jabs, meaning that their health system could be swamped in the event of a severe outbreak.