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Archinomics Monthly - July 2022

one year ago



Global equities rebounded (MSCI World Index +7.9%) amid hopes that inflation might moderate as economic growth slows. US stocks led the advance, with the S&P 500 Index recording its strongest month since November 2020 (+9.1%), while the Nasdaq Index surged 12.3% as major tech companies delivered reassuring second quarter financial results. European shares also rallied strongly. However, Chinese shares retreated (CSI 300 Index -7.0%) on concerns that rising Covid-19 infection levels would herald the return of lockdowns in key cities. China’s GDP grew just 0.4% year on year in the second quarter, jeopardising its ability to meet the official 2022 growth target of “around 5.5%”.


Global bonds rallied (10 year US Treasury +3.2%; 10 year German Bund +5.0%). Yields declined amid rising hopes that slowing global growth would mean interest rates could peak at lower levels than originally anticipated. With yields on longer dated bonds falling more than those on shorter dated debt, the US yield curve became inverted between two- and 10-year maturity bonds – such an occurrence usually precedes a recession. In Europe, Italian bonds underperformed when Mario Draghi’s resignation as prime minister cast doubt on whether the nation will be able to uphold pledges made in order to access the EU’s pandemic recovery fund.


The US dollar initially strengthened, but lost ground towards month end as weaker-than-expected US GDP data led investors to reassess the extent to which the Fed might raise rates. Meanwhile, fears that the eurozone will fall into a recession, if Russia cuts off its gas supply, undermined the euro.


Gas prices surged as Russia further curtailed supply, but elsewhere commodity prices generally weakened. Oil prices fell 4.2% to $110.00 a barrel (Brent crude) as slower growth was expected to reduce demand. Wheat prices returned to pre-invasion levels as Turkey brokered a deal with Russia to allow Ukraine to resume exports from its Black Sea ports. 

Market Volatility

Market volatility

Volatility decreased over July as investors’ appetite for risk returned. The Vix index declined 25.7% over the month to close at 21.3.

Responsible investing

Much of the northern hemisphere sweltered under an extreme heatwave in July, bringing home the reality of climate change. With the EU agreeing to reduce gas usage by 15%, many European countries are exploring alternative energy sources that are not Russia dependent. Germany is reactivating its coal-fired power stations and is considering delaying the phasing out of nuclear energy. Japan is also considering restarting its nuclear reactors – many of which were shut down following the Fukushima disaster.


The US Federal Reserve (Fed) raised interest rates by 75 basis points for the second time in two months, taking them to a range of 2.25% to 2.5% - a level that is considered to be ‘neutral’ for the economy. The European Central Bank (ECB) implemented a larger-than-expected 50 basis point rate hike in July. The move ends eight years of negative eurozone interest rates.

The US economy contracted for the second consecutive quarter between April and June, although the job market remains robust. Hopes are growing that a slowdown in US economic activity will moderate inflation, meaning that the Fed could take a less aggressive stance than had previously been flagged.

The eurozone economy grew a stronger-than-expected 0.7% in the second quarter, boosted by a rebound in tourism in France, Spain and Italy although German growth was flat. Fears of a European recession are growing, as Russia has cut gas supply through its Nord Stream 1 pipeline to just 20% of capacity, undermining the opportunity to boost gas storage ahead of winter.


on the

There are no scheduled Fed or ECB meetings in August. The Bank of England, however, is widely expected to raise rates again. Governor Andrew Bailey indicated that a 50 basis point increase was a possibility – such a move would be the largest increase since 1995. UK inflation accelerated further in June, reaching a fresh 40 year high of 9.4%.

After Boris Johnson’s resignation, the race is on to become the UK’s next prime minister. The field has been narrowed to two candidates: Liz Truss, the current foreign secretary, wants to cut taxes to stimulate economic growth, while Rishi Sunak, ex-chancellor, wants to keep taxes high to pay for the pandemic. The decision will be made by 200,000 Conservative Party members, representing just 0.3% of the UK population.

Covid-19 infection rates are rising again in China. If the country sticks with its strict zero-Covid policy, this is likely to lead to new curbs and lockdowns, further suppressing the outlook for economic growth and extending supply chain disruptions. The latest high level meeting of China’s Communist Party suggested that the government was abandoning efforts to hit its official growth target of “about 5.5%”, but had not set a new target.


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