Introduction……
We have seen significant movements in equities year-to-date, with strong commodity price movements, some company earning weaknesses, the ongoing war in Ukraine, and further clarity on changes to central bank policy continuing to drive markets lower during much of this period. During May we did see a bounce in prices as markets attempted a ‘risk-on’ move. This came after there was some more positive news out of China with regard to the easing of its Covid-19 restrictions, also along with what was perceived as a set of less hawkish minutes from the Fed’s May meeting. This short-lived rally has since been undone after higher-than-expected inflation results have come through for both the Eurozone and the US, leading investors to price in more aggressive monetary tightening this year.
Interest rates are on the rise, and are inevitably going to increase further – from extraordinarily low levels – and much of this has been priced in by financial markets over the last quarter. Central banks are however in a difficult situation: inflation is well above their targets, with the elevated price of oil keeping inflation high in the short-term. However, more medium-term indicators suggest supply-side constraints are easing, and that inflation will eventually come back down.
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