Markets in H1: The Near Perfect Storm

  • MSCI world shares largest decline in H1 since index creation
  • Deutsche Bank estimates worst Treasury bill since 1788
  • Commodity bulls push oil up 50%, gas up 60%
  • Yen takes a beating as dollar soars high

LONDON, June 30 (Reuters) – Investors knew 2022 would be a bumpy ride after two years of COVID-19 chaos, but no one expected this – the most turbulent first half of global markets ever.

To understand how scorching things have been, consider two things. MSCI’s world stock index of 47 countries (.MIWD00000PUS) has suffered its largest H1 drop since its inception in 1990.

At the same time, 10-year US Treasuries — the benchmark for global lending markets and traditional assets in hard times — had their worst first half since 1788.

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Why? The Russian invasion of Ukraine boosted rapidly rising inflation, forcing major central banks to raise interest rates and warn politicians about new world orders.

The result? A destruction of $13 trillion in world equities, a 15.5% drop in the Japanese yen, Italy’s worst defeat since the eurozone crisis, and what will be the strongest increase in commodity trade since World War I.

Add to that the fact that Russia has eroded the global financial system, that country’s sovereign credit downgrade (the largest ever seen), widespread crypto and big-tech carnage, and worsening recession jitters.

“It’s pretty much the perfect storm,” said Daniel Wood of William Blair, an emerging market bond portfolio manager, which is also experiencing its worst first half on record. “Volatility has gone through the roof.”

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The drama started as soon as it became clear that COVID would not shut down the global economy again and that the world’s most influential central bank, the US Federal Reserve, was serious about raising interest rates.

Those 10-year Treasury yields that are driving up global borrowing costs rose from less than 1.5% to 1.8%, causing the MSCI global stock index to fall 5% in January alone.

Fast forward and that yield is now at 3.1% and stocks are down 20%. Inflation is at its 40-year high and the Fed is poised for the fastest rate hike since 1994.

Treasuries have lost more than 13%, according to Deutsche Bank, the most since the US Constitution was ratified in 1788; Italy’s bonds have suffered a 25% blood loss in preparation for the European Central Bank’s first rate hike in more than a decade; and emerging market debt is down nearly 20%.

“Government bonds are not expected to lose more than 10% in six months,” said JPMorgan Asset Management global strategist Hugh Gimber. “This is uncharted territory for most investors. Central banks have seen the markets come under pressure and have not responded. That’s something else.”

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SCARS

The dollar’s strong strength has seen it gain 9% against a basket of the world’s major currencies in the first half and gain a much larger 15.5% against the Japanese yen, which weakest level since 1998.

Turkey’s self-inflicted inflation and policy problems have cost the lira another 20%. Egypt, one of the largest wheat importers, has been forced to devalue its currency by more than 15%, while at the other end of the spectrum, the Russian ruble has risen 40% on paper.

However, this is not an accurate reflection of its value, as Western sanctions over Ukraine’s “special military operation” and Russia’s domestic capital controls mean that the currency can no longer be traded freely. In fact, there are only two currencies higher against the dollar with any certainty: the Brazilian real and the Mexican peso, up 6% and 2% respectively.

Crypto markets, meanwhile, have been hammered by the recent collapses of the TerraUSD and Luna “stablecoins”, and the 55% bitcoin slump this quarter.

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POSITIVES

In many ways, it all comes down to commodity markets, where 50% and 60% increases in oil and gas are fueling global inflation.

This is the biggest H1 crude oil gain since 2009. But on top of that are another 20% and 30% jumps in wheat and corn and some violent presses in metals. So BofA estimates that commodities as a package are on track for their best year since 1915.

However, the recession fear is starting to gnaw. Copper is down nearly 20% since March, which is the biggest quarterly drop since the pandemic of early 2020, and tightly pressed nickel and zinc have decompressed 20% and 25%, respectively.

BofA commodities analyst Michael Widmer says more volatility is likely, largely due to limited supply. “The next six months will be particularly problematic,” he warned.

However, some try to see the positive sides.

Beaten up Chinese stocks are on the cusp of the traditional definition of a bull market as they are up nearly 20% from their lows.

Deutsche Bank’s Jim Reid, meanwhile, found that the five worst H1 performances of the US S&P 500 before its nearly 20% slump this year have all been followed by major rebounds.

“In order of H1 declines, we saw 1) 1932: H1 -45%, H2 +56%, 2) 1962: H1 -22%, H2 +17%, 3) 1970: H1 -19%, H2 +29% , 4) 1940: H1 -17%, H2 +10%, 5) 1939: H1 -15%, H2 +18%,” Reid said.

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Reporting by Marc Jones; Editing by Bradley Perrett

Our Standards: The Thomson Reuters Trust Principles.

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