Market Commentary: April - June 2022
Over the period April to June 2022, equity and bond markets continued to be fraught with much volatility with investors suffering some heavy drawdowns. The S&P 500 fell -16.73% from 4,546 to 3,785 and officially entered bear market territory (a decline greater than 20% from previous highs) on 13th June. The S&P Euro Plus also endured a difficult quarter, with the index falling from 2,204 at the start of April to 1,941 on 30th June, a decline of -11.93%, to 7,169. Here in the UK, the FTSE 100 has proven to be relatively robust, falling -4.89% from 7,538 to 7,169. Though it should be noted the index has been a relative laggard over the last 5 years having, in contrast to other developed market stock markets, not yet beaten its previous all-time high set back in May 2018.
As has been the case for the vast majority of 2022, the news over the second quarter has been dominated by headlines about inflation and the cost of living crisis. One of the main catalysts that has exacerbated this economic picture has been Russia’s invasion of Ukraine, given the impact it has had upon global energy prices. After the initial invasion started on 24th February, the West has been united in opposition and condemnation of Putin and Russia which has led to an economic conflict between the opposing sides with sanctions by European, North American and Oceanic countries being implemented with the aim of constraining the Russian economy and make Putin’s ability to wage war more difficult. Despite these efforts, Russia have been able to weather the immediate storm due to soaring gas and energy prices – and a requirement that their supplies must be paid for in Roubles by ‘unfriendly countries’, something which has naturally buoyed their currency after initial falls of around 45% vs the US Dollar from 1st January. Some relative brevity could be found in this situation in late June, with G7 leaders poking fun at Putin’s tendency to pose topless for photos to portray a macho image – to which Putin replied in a rather playground manner that it would be ‘disgusting’ to see them strip off.
Whist much of 2021 witnessed inflation fears and prints increasing steadily, this calendar year has seen levels of inflation across the globe hit hights not seen for 40-years. Current CPI inflation is at an alarming 9.1% in the US, 8.6% in the Eurozone, and 9.1% in the UK. A portion of these high inflation prints was broadly anticipated due to worldwide demand roaring back to life after covid-induced lockdowns. However increased strain on supply chains made worse by the war in Ukraine means price rises will last longer and hit deeper than otherwise expected. In response, central banks across the world have conducted an about turn and have, in contrast to 2020 and 2021, been pursuing a tighter monetary policy response in which interest rates have been raised and quantitative tightening (rather than easing) enacted with the objective of choking off some of the overheating in the economy. The UK interest rate currently stands at 1.25% (the highest since the Great Financial Crisis), with market expectations being that this will reach 2.50% in February 2023.
Another feature of the period was the implosion of cryptocurrency markets. Known for their volatility and violent swings over short periods of time, the asset class has nevertheless been lauded by its proponents as a potential hedge against inflation. Bitcoin, the most recognised cryptocurrency, which in 2021 was at times worth over $60,000, fell -56.80% from $46,296 on 1st April to $19,986 on 30th June. Casting arguably even greater shockwaves through the crypto world, however was the failure of a project known as ‘TerraUSD’, a coin which used the blockchain technology to simply track the US Dollar on a 1:1 basis and had been regarded as potentially providing a glimpse into the future of payments and currencies. TerraUSD now trades for $0.0429, having traded at $1.0002 on 3rd May.
Recent months have also seen the political turmoil in Westminster reach fever pitch, with Boris Johnson enduring scandal after scandal and Conservative MPs feeling they had no choice other than to submit no-confidence letters against his government. On Monday 6th June, 54 MPs had done so, thereby triggering a vote of no confidence which was held that evening. After Tory rebels initially believed Johnson would comfortably win, they were emboldened by his lack of ability to assuage the fears of many backbenchers that he could lead a government free of allegations of corruption, sleaze, and scandal. Whilst this specific confidence vote in June was won, Boris Johnson ended up resigning on 7th July after a total of over 50 ministers and their aides resigned in protest to his continued premiership. These dissenters included several senior members of Johnson’s cabinet with the most notable being Chancellor Rishi Sunak, who himself is highly likely to be in the final two in the contest to become the next Leader of the Conservative Party and Prime Minister of the United Kingdom.