Please see below article received from Brooks Macdonald this morning, which provides an update on markets with a focus on current geo-political events.
What has happened
The financial press is awash with statistics that describe quite how poor H1 was for markets. Some of the more impactful include the worst H1 in total return terms for US equities in 60 years and US 10-year Treasuries have had their worst H1 since… 1788. Yesterday was a fitting end to the turbulent quarter with any positive gains from quarter end rebalancing more than offset by fears over incoming economic data.
Recession fears
June has been characterised by a rapid increase in the market’s implied chance of a US (and global) recession. Yesterday’s string of economic data added incrementally to those fears with US weekly initial jobless claims showing signs of trending higher from the start of the year, and personal spending (inflation adjusted) declining -0.4% in May. The Atlanta Fed 2Q GDP nowcast which attempts to estimate GDP as various data points are revealed, suggested a -1% contraction in Q2. Given US Q1 GDP was negative (though arguably for international rather than domestic reasons), another decline would bring the US into a technical recession. There were some better signs yesterday in the Core PCE inflation readings which grew by 0.3% month-on-month versus expectations of a 0.4% gain. Regardless of this one data point, markets are still fearful of how central banks can respond to this deteriorating economic outlook given enduring inflation pressures.
Energy
One of the major drivers of this enduring inflation pressure is energy, with the supply of Russian oil and gas a particular problem for continental Europe. Yesterday there was some more constructive news with President Biden set to travel to the Middle East in July to discuss increasing oil supply. OPEC+ have ratified a further increase in the bloc’s oil supply which will help to ease some of the supply issues.
What does Brooks Macdonald think
Risk sentiment enters H2 in a despondent mood, particularly as Q2 saw relatively few places to hide from the sell-off in equities and bonds. With yields having now risen significantly since the start of the year, the worst of the bond sell-off may be behind us unless inflation shows signs of becoming much more stubborn than the market currently expects. Against that backdrop, bonds can start to play a more active role in balanced portfolios, providing an additional option to investors looking to diversify away from their equity risk.
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World GBP | -1.6% | 0.4% | -5.1% | -11.3% | |
| MSCI UK GBP | -1.9% | 2.3% | -5.2% | 1.6% | |
| MSCI USA GBP | -1.4% | 0.0% | -5.0% | -12.5% | |
| MSCI EMU GBP | -1.8% | 0.6% | -8.1% | -16.8% | |
| MSCI AC Asia ex Japan GBP | -1.5% | 1.5% | -1.0% | -6.9% | |
| MSCI Japan GBP | -1.0% | 0.4% | -4.5% | -11.4% | |
| MSCI Emerging Markets GBP | -1.7% | 1.2% | -3.2% | -8.4% | |
| Bloomberg Sterling Gilts GBP | 0.9% | -0.3% | -2.0% | -14.8% | |
| Bloomberg Sterling Corps GBP | 0.4% | -0.8% | -3.4% | -14.2% | |
| WTI Oil GBP | -4.1% | 1.9% | -4.4% | 56.3% | |
| Dollar per Sterling | 0.4% | -0.7% | -3.4% | -10.0% | |
| Euro per Sterling | 0.1% | -0.3% | -1.0% | -2.3% | |
| MSCI PIMFA Income | -0.7% | 0.5% | -4.2% | -8.8% | |
| MSCI PIMFA Balanced | -0.9% | 0.7% | -4.4% | -8.9% | |
| MSCI PIMFA Growth | -1.2% | 1.0% | -4.8% | -8.4% | |
| Index | 1 Day | 1 Week | 1 Month | YTD | |
| TR | TR | TR | TR | ||
| MSCI AC World USD | -1.1% | 0.0% | -8.4% | -20.2% | |
| MSCI UK USD | -1.5% | 1.8% | -8.5% | -8.6% | |
| MSCI USA USD | -0.9% | -0.4% | -8.3% | -21.3% | |
| MSCI EMU USD | -1.3% | 0.1% | -11.3% | -25.1% | |
| MSCI AC Asia ex Japan USD | -1.0% | 1.1% | -4.5% | -16.3% | |
| MSCI Japan USD | -0.6% | 0.0% | -7.9% | -20.3% | |
| MSCI Emerging Markets USD | -1.2% | 0.8% | -6.6% | -17.6% | |
| Bloomberg Sterling Gilts USD | 1.1% | -1.3% | -5.5% | -23.6% | |
| Bloomberg Sterling Corps USD | 0.5% | -1.8% | -6.9% | -23.1% | |
| WTI Oil USD | -3.7% | 1.4% | -7.8% | 40.6% | |
| Dollar per Sterling | 0.4% | -0.7% | -3.4% | -10.0% | |
| Euro per Sterling | 0.1% | -0.3% | -1.0% | -2.3% | |
| MSCI PIMFA Income USD | -0.3% | 0.1% | -7.6% | -18.0% | |
| MSCI PIMFA Balanced USD | -0.4% | 0.3% | -7.8% | -18.0% | |
| MSCI PIMFA Growth USD | -0.7% | 0.6% | -8.1% | -17.6% | |
Bloomberg as at 01/07/2022. TR denotes Net Total Return
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Chloe
01/07/2022