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  Developed equity markets rallied sharply in July recouping some of the losses incurred in June.   US growth and technology stocks led the charge delivering double digit gains over the period after poor performance year-to-date. Emerging Markets, on the other hand, fell due to concerns regarding weakness in Chinese real estate markets and COVID lockdowns.  Outside of equities, investment grade and high yield bonds posted solid gains in July reversing a trend of consecutive monthly losses.  Commodity markets were mixed with crude oil prices falling while European natural gas prices surged after Russia stated that it would cut gas supplies from the Nord Stream pipeline to 20% of capacity.

  Last month’s rally appears to have been driven by expectations that inflation was close to peaking and that Central Banks may start to cut interest rates.  This more benign outlook was challenged by recent comments from the Bank of England (BOE), who after raising interest rates 0.5%, painted a particularly gloomy outlook forecasting inflation to rise more than 13% by year-end due to the impact of higher natural gas prices.  In addition, the BOE also forecasted that the UK economy would enter a recession by year end that could last most of 2023.  High inflation also pushed the European Central Bank (ECB) to deliver its first interest rate hike since 2011, taking the Eurozone out of negative rates.  The ECB also lowered its eurozone economic growth projections for 2022 to 1.4% from 2.3%.

  Moving to the US, the Federal Reserve (FED) increased rates by 0.75% for the second consecutive meeting as headline inflation figures came in higher than expected.   This was despite GDP contracting for the 2nd quarter in a row which would indicate a technical recession.  Various members of the FED noted that increased wage inflation coupled with a tight labour market has kept inflation ‘unacceptably’ high in the US and that rates were likely to continue their upward trajectory.

  In conclusion, it doesn’t appear that we are out of the woods in terms of high inflation given ongoing geopolitical issues, supply chain disruptions as well as wage pressures in developed markets.  On the corporate front, earnings results have been relatively robust so far however there is risk that earnings downgrades could weigh on equity valuations in the event of a recession.   Based on these factors, we expect market volatility to remain elevated for the time being with the potential for further downside risk.  We still believe caution is warranted and that portfolios should maintain a more defensive posture for the time being until there is more clarity on the trajectory of inflation and interest rates going forward