Market Commentary – June 2022

June 2022 Global Market Commentary

The equity and bond markets saw heavy sell-offs in the first half of 2022 on the back of the aggressive rate hike path by the Federal Reserve to tame accelerating inflation. The MSCI World Islamic Index and the Dow Jones Sukuk Index declined by 10.6% and 1.2%, respectively, in June.

The S&P 500 had its worst first half of the year since 1970, falling -20%. The persistent themes dominating the equity markets since the start of the year are the slowing global economy, the aggressive rate hikes and monetary policy tightening by key global central banks, and heightened recession fears.

The Federal Reserve raised the benchmark interest rates by 75 basis points in June to a range of 1.50%-1.75%, the most aggressive hike since 1994. The unusually large rate hike is intended to counter the rising inflation, which  is at its fastest rate since December 1981. According to the expectations of the Fed’s officials, the benchmark rate will end the year at 3.4%. Officials also cut their outlook for 2022 GDP growth to 1.7%, down from 2.8% in March.

The MSCI Europe ex-UK and the UK FTSE All-Share indices declined by -10.0% and -5.0% respectively in June. Europe is facing gas shortages as supplies from Russia are reduced. Consumer prices have risen significantly, leading to a significant plunge in consumer confidence. To combat rising prices, the European Central Bank pre-announced a 25 basis point hike in rates in July and another 25 basis point hike in rates in September.

The Chinese stock market outperformed regional peers in June. Business activity is expected to pick up further after the lifting of movement restrictions in key parts of the country. The official manufacturing purchasing manager’s index in China rebounded into expansion territory in June, reaffirming expectations of an economic recovery that will likely stream up in the second half of the year as stimulus measures are implemented.

As we enter the second half of the year, consumer demand is likely to decelerate as consumers and businesses face rising borrowing costs. Economic growth in the US is particularly  expected to be supported by a tight labor market and household savings. Inflation is becoming more persistent, implying that the Federal Reserve will maintain its aggressive stance on monetary policy tightening measures. As a result, markets are expected to remain volatile until there are signs that inflation is moderating.

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