Chart Of The Week   August 01 2022

July In Review

July In Review

Most of the global financial assets we track rebounded sharply in July, following a poor performance in the first half of the year. Expectations that weakening economic conditions will cause central banks to pivot from hiking to cutting interest rates dominated the behavior of financial markets.

Signs of deteriorating economic conditions (see The Numbers) put downside pressure on bond yields across the world. Global sovereign bonds led all other major financial assets in terms of abnormal gains in July. US fixed income performed exceptionally well, with high yield and investment grade bonds, as well as Treasuries, among the financial assets with the highest z-scores.

Falling bond yields created a tailwind for global equities which benefitted from a US-led broad-based rally. The S&P 500’s year-to-date losses shrunk to 13% following July’s 9% increase. Chinese onshore and investable stocks (which advanced in May and June) are the only major equity indices we track that generated negative returns last month.

Meanwhile, the countercyclical greenback continued to strengthen against both the euro and  Asian currencies. Similarly, worries about the economic slowdown weighed on the outlook for commodity demand. Brent fell 7%, gold lost 2.6%, and the Bloomberg industrial metals index gained a meager 1.5%.

Our cyclical indicators suggest that US Treasury yields still have room to fall over the near term, especially as inflation moderates. These dynamics could continue to provide a tailwind to equities over this time frame. However, we expect the Fed to disappoint investors by remaining hawkish in 2023 (see Country Focus). In the Eurozone, energy supplies remain at risk, raising the likelihood of a recession in H2. And in China, poor sentiment, the property market slump, the rotation in global demand from goods to services, and the zero-Covid policy will continue to dampen the outlook for the economy and stocks.

Thus, the strong performance of risk assets in July is not sustainable.