Global equities took a breather in the past week, after having approached oversold conditions, with the MSCI ACWI up by 4.8% wow (-19% year-to-date). Risk appetite increased early in the current week, as well.
Support was provided by signs of plateauing in investors’ expectations regarding how far central banks will go with interest rate hikes. Expectations for the Fed’s FFR and ECB’s DFR a year ahead, retreated by circa 50 bps respectively versus mid-June, to 3.3% and 2.0%, respectively. Some stabilization in international prices of commodities has contributed to lower long-term inflation expectations as well, albeit caution is warranted as commodity prices demonstrate high volatility.
The outlook for monetary policy tightening remains unclear. In the event, recent commentary from Federal Reserve officials remains hawkish, with FOMC members (Daly, Bowman) advocating in favor of another 75 bps hike in the FFR in the next meeting (July 27th). Daly also cited that the Fed could start to discuss the deceleration of Quantitative Tightening no sooner than in 2024.
A synchronized monetary policy tightening is well underway, in order to cope with elevated inflation. 9 out of 11 major central banks in developed economies increased policy interest rates in Q2:2022. The European Central Bank is expected to join them by announcing an interest rate hike, most probably by 25 basis points, in its July meeting. According to President Lagarde (Sintra, June 28th), the ECB would start tackling any “unwarranted fragmentation” in bond markets by using flexibility in its PEPP (total envelope of €1.7T) reinvestments.
On the other hand, the Bank of Japan maintains its ultra-accommodative stance with no intention to deviate from it, whereas holds circa 40% of the domestic government debt (2021 Gross Debt/GDP of 263%).
The geopolitical backdrop remains highly fluid, with the G7 and the NATO Summits at the spotlight, amid the escalating Russian-Ukraine war. According to the G7 communique, the European Union decided to explore with its international partners ways to curb rising energy prices, including the feasibility of introducing temporary import price caps.
The NATO Summit (June 28th- 30th) will be monitored for any progress regarding Turkey’s objections for the inclusion of Finland and Sweden in the alliance. Furthermore, in mid-July, US President Biden, will visit Saudi Arabia to attend a Summit of the Gulf Cooperation Council plus Egypt, Iraq, and Jordan, and possibly pressure for further increase of the country’s oil production.
The forthcoming OPEC+ meeting will take place on June 30th, following the previous meeting’s decision to upwardly adjust the oil output increase plan for July and August to 648k barrels per day in each of these two months, bringing forward the planned September hike of 432k barrels per day. Nevertheless, the fact that some countries already fail to adhere to tallied quotas raised concerns if the production increase could be implemented. According to OPEC’s June 2022 projections, global oil demand is expected to rise to 101.8 million barrels per day (mb/d) on average in H2:2022 from 98.7 mb/d on average in H1:2022.