• October 3rd, 2022
• By Midsilver Investment Limited

During the review period, financial markets were influenced by declining growth expectations and changing views on monetary policies. Economic performance suffered due to the repercussions of the Ukraine conflict and challenges in China. The acceleration of global monetary tightening, coupled with energy challenges in Europe, led to fluctuations in inflation and policy rate predictions, resulting in market instability.

Two significant shifts occurred in the markets for risky assets and sovereign bonds. In mid-June, the Federal Reserve's unexpected rate hike led investors to predict a decrease in inflation and a leveling of policy rates. This relaxed financial conditions and narrowed corporate spreads. A striking contrast appeared: while most stock markets surged, the US yield curve steeply inverted—often seen as a recession precursor—and other regions witnessed a flatter curve. By August, a more assertive approach to combatting inflation and escalating energy concerns in Europe caused financial conditions to tighten, pushing risky assets down and elevating core yields. Overall, the market seemed optimistic about overcoming the high inflation challenges.

The complicated economic landscape was mirrored in commodity markets. Metal prices maintained their descent from the second quarter, largely due to China's slowing activity. Although global oil prices began dropping in mid-June, disruptions in Russian gas supplies propelled European natural gas prices to unprecedented levels, affecting industrial stocks and electricity expenses. The extreme volatility of natural gas and electricity prices persisted towards the end of the review period, underscoring the mix of geopolitical events and potential market speculation in a strained intermediary environment.

The US dollar saw widespread appreciation against other advanced economy (AE) currencies. Factors like prior US monetary adjustments and the European energy dilemma pushed the dollar to its zenith against the euro and yen in over twenty years, with the appreciation happening at an unusually swift rate.

Emerging market economies (EMEs) exhibited varied market behaviors. To counter high inflation, stricter monetary policies kept yields in Latin America notably higher than in Asia, which also helped limit the depreciation of several currencies. Concurrently, the diminished strength of the euro, yen, and renminbi meant that trade-weighted exchange rates appreciated for numerous EMEs.