Market Updates

Geopolitical tensions between Russia and Ukraine remain heightened, with gas supplies restricted by Russia’s political posturing. Meanwhile, US Speaker of the House of Representatives Nancy Pelosi’s visit to Taiwan has caused some shockwaves and signaled a deterioration in US-China relations.

BlackRock prefer investment grade (IG) credit over equities on a tactical horizon as they see a new market regime with higher volatility taking shape. They believe IG credit can weather a significant growth slowdown whereas equities don’t look priced for this risk.

Investors are strapped in for a market rollercoaster in a new regime of increased volatility. Views on central bank rates are shuffling fast, as last week’s market reaction to the Fed’s rate hike showed. BlackRock think this warrants careful thought about portfolio changes. But change is hard.

Last week saw a strong end to the month, which helped many equity indices claw back some of the first half of year losses and have their best monthly performance for some time. There was a glut of corporate earnings and some better-than-expected results from index heavyweights in the United States helped sentiment

European equity markets proved resilient last week despite a larger-than-expected ECB rate hike (as discussed), weak macro data and regional political uncertainty (Italy and United Kingdom). Sentiment was helped somewhat by Russia resuming gas flow via Nord Stream 1 following a maintenance shutdown and some reassuring US corporate earnings.

The Fed is set to raise rates by an additional 0.75% or more this week as it scrambles to raise the fed funds rate into restrictive territory to rein in inflation. Market views on what to expect next for rates have been volatile. Why?

The European Central Bank (ECB) is set to lift rates for the first time in over a decade this week. Both the ECB and Fed are for now pandering to “the politics of inflation,” or pressure to tame inflation.

BlackRock think the Great Moderation is over. What’s replaced this era of steady growth and inflation? A new regime of increased macro volatility and higher risk premia. Central banks appear set on reining in inflation by crushing growth.

Political events take centre stage in the week ahead. After Johnson announced his intention to resign as UK prime minister, the ruling Conservative Party must now choose a successor. The timetable for that contest is expected within days.

We see an era of structurally higher commodities prices ahead. Why? First, look back. Prices ran up because the economic restart drove demand amid abnormally low supply. The West has tried to wean itself off Russian energy after years of declining investment. Now, look forward. We see structurally higher prices amid tight supply for energy and rising demand for metals that will be critical to power the path to reach net-zero carbon emissions by 2050.