Sabco® Investment's Monthly Market Report - June, 2022

Sabco® Investment's Monthly Market Report - June, 2022

Equities and bonds had a challenging start in the first half of 2022, with June offering no respite from the negative trend. This period marked the worst performance in five decades, largely influenced by various factors. The war in Ukraine, energy supply risks in Europe, rising inflation, and China's slowdown due to its persistent zero-COVID policy were significant concerns for the markets. The resulting uncertainty caused significant price fluctuations, leading to negative performances across all sectors except for energy.

June continued the negative trend, as central banks implemented drastic measures to control inflation. Economic figures were closely analyzed for their implications on monetary policy. In terms of geographic performance, the US stock market underperformed the European market in local currency. However, due to the strengthening dollar, the European stock market was the weakest performer in euro terms. Latin American stock markets also struggled due to falling commodity prices. Asian emerging markets fared relatively well, with the Chinese stock market even posting positive performance thanks to improving COVID conditions. In the US, value and growth shares had similar performance, while in Europe, growth shares slightly outperformed, potentially reflecting a shift in interest rate trends.

Bond yields experienced significant movement in the past six months, with German 10-year yields rising from -0.18% to 1.75% in mid-June. Similarly, US 10-year yields increased from 1.5% to 3.5% during the same period. In the first half of June, interest rates continued their upward trend but then sharply declined, possibly triggered by the Federal Reserve's announcement of a larger-than-expected interest rate increase. This reversal highlighted concerns of excessive tightening and increased recession risks.

In the eurozone, bond spreads for southern eurozone countries continued to widen at an accelerated pace, with the Italian bond spread reaching nearly 250 basis points in mid-June compared to 100 basis points a year ago. An additional meeting by the European Central Bank helped ease tensions and bring spreads back to earlier levels.

Corporate bond spreads in the eurozone widened considerably over the past six months, reflecting investor risk aversion and a challenging environment for companies due to higher costs and uncertain economic growth. This trend of higher spreads accelerated in June.

The Federal Reserve implemented a significant 0.75% interest rate hike, the most substantial increase in the US since 1994. Short-term interest rates rose from 1.50% to 1.75%, with a strong commitment from the Fed to bring inflation back to its 2% target.

The Swiss central bank surprised with a 50 basis points interest rate hike, the first in 15 years. Despite subdued inflation, the Swiss National Bank (SNB) demonstrated a willingness to act against inflation risks. The Swedish central bank also raised its interest rate by 50 basis points to 0.75%, with expectations of further hikes. The Bank of England implemented the fifth interest rate increase in the UK since December.

As expected, the European Central Bank announced a rate increase in July, along with the end of the bond-buying program. To address increasing bond spreads in the southern eurozone countries, the ECB held an unscheduled meeting and introduced flexibility in reinvesting maturing bonds on its balance sheet. The development of a new anti-fragmentation instrument was also prioritized.

The euro's brief recovery in May was erased in June due to increased recession risks in the eurozone. The Swiss franc surpassed parity with the euro, driven by the surprise interest rate hike from the Swiss central bank. The Japanese yen continued to weaken, reaching multi-decade lows against the USD, primarily due to policy differences between the central banks of Japan and the US.

Commodity prices, particularly industrial metals, experienced significant declines in June, influenced by the heightened risk of recession and higher interest rates. Copper, aluminium, zinc, and nickel prices fell between 10% and 20%, despite stabilizing economic activity in China. Oil prices were moderately affected by recession concerns, fluctuating between USD 110 and 125 per barrel but remaining near recent highs. The European gas price saw a sharp rise due to further reductions in gas supplies from Russia.

Gold prices experienced a slight decline but remained above USD 1,800 per ounce. The rise in real interest rates had limited impact due to ongoing geopolitical risks.