In May we wrote about red flags, well those flags were raised even higher in June, with soaring inflation, equity bear markets and a government bond rally in the second half.
Big names have come out in force to talk up recession, including Jamie Dimon and even Elon Musk, with Dimon saying we need to batten down the hatches. To be fair, we probably need a miracle to avoid a recession, with no end in sight for these inflationary pressures and China locked-down in little rush to get back into the markets.
Goldman Sachs has dialled-up the chance of a US recession from 15% to 30% and investors are scrabbling around to get a real return. Certainly there is plenty of head-scratching.
US inflation has been running hotter than expected, hitting 8.6%, which according to the Federal Reserve Bank of San Francisco is largely down to supply constraints. Fed chair Jay Powell says that the “economy is resilient” but inflation surprises are factors that are out of his control. S&P Global’s PMI covering services and manufacturing may have come in at 53.1 for June (above Reuters consensus), but the measure of new factory orders fell below 50.0 to 49.6 and consumer sentiment is at an all new low.
Likewise, the UK’s latest inflationary figure came in at 9.1%, the highest for 40 years. While GDP fell 0.3%, which is higher than the 0.1% drop that was forecast. This has certainly not been helped by transport strikes and general political turmoil. In fact, the UK’s trade performance figures for the first quarter were the worst on record (this data goes back to 1955!).
This general lack of confidence has been feeding through to the capital markets. According to Refinitiv figures IPOs and other capital raisings in Europe and the US have been at around a quarter of the same period last year.
War in Eastern Europe unfortunately continued to grind on and Russia does appear to be gaining a small foothold, albeit scaled back from initial goals. The worrying talk from Putin is about his greater aspirations, as to what this means only time will tell, but there is certainly no let-up in the pressure and toll being exerted on the poor Ukrainians.
For much of the month oil was back-up at $120 territory, although it dropped mid-month on recessionary slowdown fears and ultimately had its first monthly decline since November. From the outside, the pressure on Russia appears to be paying few dividends, with China and India unapologetic buyers of Russian crude. UK diesel prices rose above £2 a litre for the time. Whether this is peak only time will tell, but the IEA has said that prices may not head too far south as supply will struggle to keep up with demand, a statement that is only likely to see continued demand for Russian oil.
June was a month of rate rises. In the US, the Fed raised rates by 75bps, its biggest increase since 1994 with the market expecting further similar sized increases and ultimately by year-end an interest rate of around 3% to 3.5%. In the UK, the Bank of England raised rates by 25bps to 1.25%, a thirteen-year high. Even the Swiss National. Bank, which has not raised rates since 2007, raised rates by 50bps. The ECB is following suit, although it always takes a little longer to get going, with a quarter percentage point rise set for its July monetary policy meeting and more to come, with the market pricing in a 50bps increase in September.
Crypto went into freefall, a move that saw bitcoin drop from what had appeared a reasonably solid floor of $29,000 to $24,000 and over the weekend of 19 and 20 June touched $17,000, before heading back to $22,000, then falling back to $19,000 by the end of the month. This was a proxy for what was going on in the space, although Ethereum fared even worse. The Financial Times likened the situation to crypto’s very own ‘credit crisis’ and there has been much talk of a crypto winter. Certainly, confidence was not helped by crypto lender Celsius halting withdrawals, followed up by Binance ‘pausing’ bitcoin withdrawals.
Into month end and equity markets were firmly on a knife edge. The last trading day however proved a real stinger as markets went firmly into risk-off mode. Throughout the month, global indices reacted badly to central bank action and the constant stream of negative news. There were some vicious moves during the month and the S&P cemented its place in bear market territory, although these tended to be followed-up by snapback or comeback rallies, dead cat or otherwise, an example being 24 June when the S&P 500 rose by more than 3%. But by month end, the S&P 500 was down almost 8% and down over 20% for the year, which is its worst first half year performance since 1970. The FTSE 100 was also down almost 5% in June, although the index has been more resilient year-to-date given its high exposure to commodity related companies. The Dax fell 11% in June and is now in similar bear market territory as the S&P 500, down over 20% year to date.
For much of the month, the VIX remained elevated in the 30s. This is clearly far above the average of around 17, but it is still under 40, which is viewed at the feal fear marker. It closed the month just under 29.
In metals, markets remain largely quiet. China appears to be out of the game for the time being with little appetite. Dr Copper, the bellwether of the economy, even hit a 16-month low. Gold and silver also fell, with the latter down almost 6%. According to the Bloomberg Industrial Metals Spot Subindex, metal prices fell by the most since 2008.