H1 markets: The almost perfect storm

  • MSCI global stocks fell the most in the first half since the index was created
  • Deutsche Bank estimates worst for Treasuries since 1788
  • Commodity bulls lifted oil 50% and gas 60%
  • Yen Takes Blows as Dollar Rises High

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

To grasp just how steamy things have been, consider two things. The MSCI index of 47-country global stocks (.MIWD00000PUS) suffered its biggest drop in the first half since its inception in 1990.

Meanwhile, 10-year U.S. Treasuries — the benchmark of global debt markets and the traditional benchmark asset in troubled times — had their worst first half since 1788.

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Why? Russia’s invasion of Ukraine amplified what was already soaring inflation, forcing major central banks to raise interest rates and politicians to warn of new world orders.

The result? A $13 trillion wipeout from global stocks, a 15.5% plunge in the Japanese yen, Italy’s worst rout since the eurozone crisis and what’s shaping up to be the strongest rally in commodities since the First World War.

Add to that Russia being squeezed out of the global financial system, that country’s sovereign credit rating downgrade (largest ever), widespread crypto and big tech carnage, and heightened nervousness in recession.

“It’s pretty much the perfect storm,” said Daniel Wood of William Blair, a portfolio manager in emerging market debt, which is also having its worst first half. “Volatility has exploded.”

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Drama erupted as soon as it became clear that COVID was not going to 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. ‘interest.

Those 10-year Treasury yields that drive global borrowing costs rose from less than 1.5% to 1.8%, sending the MSCI Global Equity Index down 5% in January alone.

Fast forward and that yield is now at 3.1% and stocks are down 20%. Inflation is at its highest level in 40 years and the Fed is poised for its fastest interest rate hike since 1994.

Treasuries fell more than 13%, the most since the US constitution was ratified in 1788, according to Deutsche Bank; Italian bonds haemorrhaged 25% 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 unlikely to lose more than 10% in six months,” said Hugh Gimber, global strategist at JPMorgan Asset Management. “This is uncharted territory for most investors. Central banks saw the markets under pressure and did not react. That’s what’s different.”

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The mighty strength of the dollar pushed it up 9% against a basket of major global currencies in the first half of the year, and it rose 15.5% against the Japanese yen, which remained at its weakest level. since 1998.

Turkey’s self-inflicted inflation and political troubles cost the pound another 20%. Egypt, among the biggest wheat importers, was forced to devalue its currency by more than 15%, while at the other end of the spectrum, the Russian ruble is, on paper, up 40% .

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

Meanwhile, crypto markets have been hammered by the recent collapses of stablecoins TerraUSD and Luna, and bitcoin’s 55% drop this quarter.

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In many ways, it all hinges on commodity markets, where the 50% and 60% rises in oil and gas are fueling global inflation.

This is the biggest rise in crude in the first half since 2009. But this is in addition to jumps of 20% and 30% for wheat and corn and some violent cuts in metals. So, BofA believes that commodities as a pack are on track for their best year since 1915.

However, recession anxiety is starting to gnaw away. Copper is down nearly 20% since March, its biggest quarterly decline since the pandemic plunge of early 2020, and tightly squeezed nickel and zinc decompressed 20% and 25% respectively.

BofA commodities analyst Michael Widmer says more volatility is likely, largely due to limited supply. “The next 6 months are going to be particularly problematic,” he warned.

Some, however, try to see the positives.

China’s battered stocks are on the cusp of the traditional definition of a bull market, as they are up nearly 20% from their low.

Deutsche Bank’s Jim Reid, meanwhile, found that the five worst performers in the US S&P 500 before this year’s nearly 20% plunge were all followed by big rebounds.

“In order of H1 declines, we saw 1) 1932: 1932 – 45%, 2 +56% in H2, 2) 1962: 22% in H1, 17% in H2, 3) 1970: 19% in H1, +29% to H2, 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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