Global equities rose in July following better-than-feared earnings reports for Quarter 2. Falling bond yields helped prompt improved valuations, boosting investor demand.
The equity market rally was led by the US– one of the major underperforming markets during the first half of 2022. The US equity index possibly gained from expectations that the Federal Reserve (Fed) could end its tightening cycle sooner than initially anticipated. European equities were also up despite the European Central Banks’s (ECB) decision to raise policy rates and weak economic data.
At the other end of the spectrum, some emerging markets remained under pressure, with the mainland China equity index falling the most across all major markets globally. Concerns related to the property market seemed to weigh on investor sentiment, and new COVID-19 cases in some cities, added to the list of worries related to the market.
Across sectors, recovery was mostly driven by the cyclical sectors – Consumer Discretionary, Industrials and Technology, all outperformed the global index. Conversely, relatively defensive sectors – Telecoms, Consumer Staples, Healthcare and Utilities, all underperformed. Meanwhile, commodities driven sectors, Basic Materials and Energy, also underperformed on the back of softer underlying prices.
Short term yields across developed bond markets moved largely in line with central bank policy, but longer dated yields dropped on recession fears. Central banks across the world continue ‘frontloading’ their cycles with the ECB delivering a 0.50% hike and the Fed continuing on their hawkish path by hiking 0.75%, though there were signs the Fed is becoming more cautious.
The US dollar (DXY) ended July marginally higher after reversing nearly all of the gains made in the first half of the month although these gains were concentrated against the EUR. The EUR was the worst performing G10 currency in July, with EUR-USD falling 2.5% as political uncertainty, the gas crisis, and disappointing economic data pressured the pair lower. That said, the EUR reversed some losses into month-end after the ECB’s unexpected 0.50% hike on 21 July. GBP closed the month basically flat against the USD.
Fearing a global recession, oil prices fell 4% in July (Brent crude) as concerns of a global recession intensified. The bulk of the gains triggered by Russia’s invasion of Ukraine were reversed, with central banks hiking rates to tame inflation and therefore increasing fears of a slowdown that will negatively impact demand for commodities including energy.
Global growth remains challenged by rapid central bank policy tightening, and further upside inflation surprises that is squeezing real incomes. There is a rising chance the UK and Eurozone tip into recession this year, and the US enters a downturn in 2023, although elevated uncertainty means precise timing is difficult to predict.
Positively, however, the depth and duration of any recession may be limited by healthy private sector balance sheets and moderate fiscal support. Furthermore, falling inflation later this year should allow central banks to adopt a more neutral policy stance.