This market commentary covers the second quarter (Q2) of 2022, a period dominated by ongoing interest rate rises in the UK and US and record inflation numbers.
In the US, the Federal Reserve upped interest rates from 0.75% to 1.75% over the period, while in the UK the Bank of England base rate went from 0.75% to 1.25%.
With monetary conditions continuing to tighten, equity markets remained under pressure.
The US’s S&P 500 index has lost -16.4% over the quarter (-20.6% YTD) - the worst first half of the year since 1970 and one of only nine instances since 1940 when the index has fallen more than 15% in a single quarter.
The tech-heavy Nasdaq index fared no better losing -22.4% for the period (-29.5% YTD).
In the UK, the FTSE 100 lost -4.6% in Q2 (-2.9% YTD) with the outperformance relative to other markets attributed to its high exposure to the energy sector. In contrast, the mid-cap FTSE 250 index lost -11.8% over the quarter (-20.5% YTD).
In Europe, the Eurostoxx 600 was down -10.7% (-16.5% YTD).
Bond markets also suffered as central banks hiked interest rates to battle inflation. The Bloomberg Global Aggregate bond index lost -8.3% (-13.9% YTD) a negative return for the year is rare but further highlighting the commitment by central banks to taper their respective balance sheets.
The 10-year US Treasury finished the quarter yielding 3.0%, a level not seen since 2018, up from 2.3% at the end of March and pricing in higher interest rate expectations.
The current environment of higher rates and inflation has seen increased correlation between the performance of shares and bonds. While bonds are traditionally seen as a safer alternative and an asset class to diversify equity risk, this is not something we have seen this year.
Meanwhile, rising commodity prices have remained the main driver of higher inflation, with oil increasing a further +6.4% in Q2, bringing the total YTD increase to +47.6%.
Gold declined -6.7% in Q2 (-1.2% YTD).
The British pound has been weak this year, further fuelling inflation in the UK. Sterling was down -7.3% against the US dollar over Q2 (-10% YTD). Against the Euro, the pound was down -2.2% (-2.3% YTD).
As a result, the lack of refining capacity coupled with a depreciating sterling has seen fuel prices reach an all-time high in the UK.
Despite the multi-year record inflation numbers presented by several countries, there are early signs that inflation may be starting to ease. Most basic metals and agricultural commodities continue to fall (some now trading below their end of 2021 prices), fertiliser prices continue to decline from their April peak and in the US used car prices continue to normalise towards pre-Covid levels.
That said, wage pressures could continue to add inflation. Looking forward, inflation, rising interest rates and geopolitics remain key concerns for investors. Corporate earnings and macroeconomic data are also firmly in the spotlight.
While the first half of 2022 has been a challenging period in markets, we continue to position InvestEngine’s Managed portfolios to deliver good returns over the long term.
Source: Bloomberg and InvestEngine
Date of data:
Q2: 31/03/2022 to 30/06/2022
Year-to-date: 31/12/2022 to 30/06/2022
Returns above are quoted in capital terms and exclude dividends