Market Update June Monday 27th 2022

Equity markets move higher, despite recession uncertainty

The majority of equity markets managed to record a positive week for the first time this month, despite investors’ uncertainty over the prospect of a potential recession. With the equity market still very much in negative territory for the year, and after last week’s sharp declines, markets this week took a breather and found support, perhaps an indication that the selloff had gotten slightly ahead of itself.

That said, investors remain concerned by an aggressive monetary policy tightening path which could exacerbate an already slowing economy, stoking fears of a recession. US Federal Reserve Chairman Jerome Powell told Congress on Wednesday; recession was a “possibility” as he reiterated that the central bank is “strongly committed” to bringing down inflation.

In particular, economic data this week made for disappointing reading. The Flash US Purchasing Managers Index (PMI), a survey of economic activity, showed the US economy slowing sharply in June to its lowest reading in 16 months. The index registered 51.2 indicating that economic activity is still growing, however the reading has dropped from 53.6 in the previous month. Meanwhile the Eurozone PMI also fell to a 16 month low, with a reading of 51.9 for June, well beneath estimates of 54.

As of 9am London time, over the week the US market managed to rally 3.29% with the US technology index leading the way, up 4%. Gains in Europe were more modest with the main index up 0.58%, whilst the UK market was up only 0.38%, weighed down by the underperformance of miners and energy companies in the index, after commodity prices fell this week. Markets in Asia also finished strongly with the Hong Kong index and Japanese index rising by 2.89% and 1.6% respectively.

Inflation remains stubbornly high in the UK

Much like the US or Europe, UK inflation shows no signs of abating. The latest year on year reading this week showed prices had risen 9.1%, the highest rate in 40 years, with food and energy prices the biggest drivers of inflation. The Bank of England has warned inflation could peak at 11%. The squeeze on the cost of living has encouraged workers and unions to push for higher pay rises, and this was best illustrated by strike action by Railway workers this week, bringing trains across the UK to a standstill.

Recession fears prompt a rally in core government bonds…

With markets now turning their attention from entrenched inflation to the possibility of recession, safe-haven assets rallied accordingly. As of 9am London time, the US 10-year government bond yield (which moves inversely to its price) fell 16 basis points from 3.22% to 3.06%. The sharp fall in bond yields were also followed in the UK and Europe. Equivalent 10-year German bund yields fell by 27 basis points to trade at 1.39% whilst UK gilt yields fell by 21 basis points to finish the week at 2.28%.

But Commodities pare it’s gains

Commodity prices on the other hand declined this week, as a global slowdown could see weaker demand of oil and industrial metals. Iron ore prices slumped by 8% on Monday, whilst copper is down 6% for the week as of 9am London time. The price in oil also subsided with Brent crude oil down 2.76% to trade at $110 per barrel. Gold prices remained more stable, with the price of the precious metal down 0.5% to $1,831 per ounce.