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September 2022
Summer Stumble
- Global markets bounced in July and financial conditions eased as real rates in developed markets, most notably the US, declined on lower growth expectations and perception of a peak in Fed policy tightening.
- Market participants perceived the July FOMC meeting as more dovish than anticipated, and expectations for a slower pace of hikes appear to have firmed.
- US real rates, a key driver of equity valuations and broader financial conditions, declined notably, with the 10-year TIPS yield dropping as low as 0.14% from the high of 0.70% in mid-June.
- In sympathy with the US Treasuries, the long end of the curve moved lower across major developed markets.
- MSCI EAFE rose by 5.0%, while the S&P 500 surged by 9.2%. US companies delivered better than-expected earnings results and guidance, on net, against muted expectations from analysts for the 2Q22 earnings season.
- Emerging markets lost ground as the USD gained by 1.2% against major FX, and Chinese markets dipped by 9.4%. Activity in China has been relatively weak, with the real estate sector, a major input into Chinese consumer sentiment, still struggling and growth data in July coming in weaker than expected. Expectations for a further slowdown in Chinese growth in 2H22 are becoming entrenched.
- Oil prices continued to decline and are now down roughly 25% since June. Expectations for lower global growth, China’s zero-Covid policy and real estate sector woes, and a recovery in Russian production, among other factors, have contributed to oil price declines.
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