What is the general market outlook?
The week of Midsummer ended with a sharp equity market rally, with stock prices suddenly surging in the last days of the week after a long period of downward pressure. Behind the rise was a surprising fall in long-term inflation expectations, which gave especially growth stock prices a strong boost in the USA. Consumer confidence is currently at a very low level, and it seems that the global economy is cooling off considerably.
The decline in inflation expectations and demand may suggest that the monetary measures by the central banks are already starting to kick in. At the same time, signs of a recession have increasingly been observed in the markets, which might mean that the central banks will not be forced to raise interest rates as much as feared.
The ECB’s and the Fed’s interest rate programmes have already slightly reduced overall demand. Why has the Japanese central bank not tightened its monetary policy?
Although the interest rate hikes have reduced overall demand, the ECB and the Fed have resolved not to change the interest rate programmes they have outlined. The Chinese central bank, in turn, is maintaining an expansionary stance, while at the same time raising questions about the adequacy of stimulus.
The Bank of Japan is carrying out a monetary policy experiment of its own, which includes, among other things, keeping the long end of the yield curve below 0.25%. This leaves the Japanese economy with just one “pressure relief valve”, the yen, whose exchange rate has weakened substantially against the dollar and the euro. A depreciated currency has fuelled inflationary pressures in the export-driven economy and raised questions about the sustainability of the Bank of Japan’s yield curve control policy.
Inflation expectations have fallen. Is the acceleration of inflation finally coming to a halt?
The markets are now wondering when inflation will reach its peak. Although inflationary expectations have come slightly down, the latest inflation figures indicate that prices are still on the rise.
Raw material prices, which are strongly linked to economic growth prospects, give some idea of where inflation is going. The prices of industrial metals and oil have fallen in June – a month-to-month fall or a longer term development? Time will tell.
What has happened in the equity markets?
Euro investors’ returns on the global equity markets are practically the same everywhere, but emerging markets are not quite as much in the red as the other markets. The Ukraine crisis has depressed the stock prices of European companies in particular. Growth companies, in turn, have been hit hard by high interest rates, although the return expectations for them have taken an upward turn over the past few weeks as the rise in interest rates has stabilised.
Compared to the rest of the world, Finland’s equity market has performed well over the past few months. However, the background for the good performance is the major fall experienced by Finland as a peripheral market in the beginning of the year.
What about the fixed income and alternative markets?
The fixed income market has had a dramatic year, and the indices with the longest duration and low risk have taken the biggest blows. The broad euro zone government bond index is already more than 10 per cent in the red after the first half of the year. The half-year loss on the US 10-year treasury bond is the biggest since 1788!
On a historical scale, the returns on euro zone or US investment grade corporate bonds have not been this high for a decade. The liquid fixed income markets are now also moving from the TINA principle (There Is No Alternative) to the TARA principle (There Are Reasonable Alternatives).
Corporate bond risk spreads are now relatively wide, although still far from the widest figures seen during the Covid pandemic.
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