ECONOMIC AND MARKET OVERVIEW
June saw a sharp increase in volatility and risk aversion in capital markets around the world as equity and bond markets alike sold off.
At the start of the year many equity markets around the world had elevated valuation levels but this has rapidly changed with price movement during the last few months. According to Laurium Capital, the quarter (and half year) to June was brutal for equity markets. Following the already tumultuous early March selloff when the negative effects of the Russian invasion of Ukraine and the strict Chinese Covid lockdowns first hit markets, the ongoing inflationary pressures that have continued to ripple through the global economy made the US Federal Reserve even more hawkish.
US interest rates were raised by 1.25% in the quarter, and the US forward curve prices in another 1.5% of interest rate increases by early 2023. US 10 year bond yields, factoring in both a higher risk environment as well as higher nominal inflation, rose to nearly 3% at the end of June. This first six months of 2022 rank as the worst performing six month period in over 40 years for the Bloomberg US Treasury Index, reflecting a year to date negative return on “risk free” US sovereign debt of -9.1%.
Looking ahead, the primary risk to global equities from this point is company earnings. Analysts and company executives are still expecting high double digit earnings growth over the next year; an expectation that seems optimistic given the extent of cost pressures and rising risks to consumer demand.
