Research Insights Market Commentary June 2022
Equity markets sold off aggressively in June, posting their worst month since the COVID-onset panic in March 2020. Central bank policy tightening (increasing official cash rates) has increased investor concerns that it will push economies into recession. Defensive assets continued their slide as bond yields marched higher. For the financial year to 30 June 2022, Australian bonds posted a -10.5% return which was below that of large cap Australian equities.
As US inflation printed 8.6% year-over-year in May (a 40-year high) the US Federal Reserve (“Fed”) raised the US cash rate by 0.75% in June with the Fed Funds rate now 1.50-1.75%. Some market participants expect another 0.75% increase in July. The Fed, having brushed off initial inflation spikes as transitory, is now grappling with containing rising inflation as employment remains buoyant and wage growth continues. The market believes the Fed will be too aggressive in their hiking of cash rates, with the median projection from Fed committee members now signaling US cash rates could peak at 3.8% by the end of 2023 – a level which may stifle economic growth.
Inflation concerns and recessionary fears saw investors adopt a “risk off” stance in Australian large cap equities, which fell -8.5% for the month. Consumer staples was the only sector that was positive, albeit ever so slightly. The Financial and Material sectors were the worst performers for the month, down 11.9% and 12.4% respectively.
International equities moved lower in the month by -4.6% and a falling Australian dollar (down 3.7% buying US$0.6912) escalated losses for currency hedged international equity investors to – 8.1%. Out of all the global markets, only two achieved positive returns for the month.
The RBA raised interest rates in June by 0.50% and by a further 0.50% in July, taking the Australian cash rate to 1.35%, significantly higher than the 0.10% emergency cash rate that we had from November 2020 through to April 2022. The Australian 10-year government bond yield increased by 31bps to 3.66% and the 2-year government bond yield rose by 16bps to 2.63%. The US 10-year government bond yield increased by 17bps to close at 3.01% and the US 2-year government bond yield was up by 40bps to 2.95%.
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