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Answers to your questions on global markets

We held a Drop In yesterday outlining our latest forecasts for global financial markets. This Update answers some questions that we received during that Drop In but didn’t have time to address. In view of the wider interest, we are also sending this Asset Allocation Update to clients of our Global Markets and FX Markets Services.

10 August 2022

US Weekly Petroleum Status Report

The rise in US crude stocks was in large part down to a drop in exports. More interesting was the jump in implied gasoline consumption, which probably reflects the recent fall in prices. This may not be sustainable if, as we think likely, Russia-related risks lead to higher crude prices later in the year.

10 August 2022

Emerging Markets Capital Flows Monitor

Capital outflows from EMs have eased over the past month, helping to stabilise local asset prices. But we think outflows will pick up again before long. That’s a threat to those EMs whose current account deficits have widened or are widening sharply, including Turkey, Chile and parts of Central Europe. Emerging Europe Drop-In (11th Aug): We’re expecting downturns in Central and Eastern Europe, but how bad could it get? Join this 20-minute briefing on our Q3 Outlook report, including the latest on Turkey, Russia and whether Hungary’s forint has further to fall. Register now.

10 August 2022
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Surging unit labour costs are a danger to the US stock market

Today’s news that unit labour costs in the US nonfarm business sector grew at a near double-digit annual pace in Q2 2022, as soaring wages interacted with negative productivity growth, hasn’t ruffled the stock market much. That may be because of question marks about its accuracy in light of wedges between data on expenditure, income and employment, and because investors are fixated instead on what tomorrow’s timelier consumer price report for July will reveal about inflation. Nonetheless, when unit labour costs last grew so rapidly, in the 1970s, it was a bad time for equities partly because they squeezed profits. That is a risk today.

We think the worst is yet to come for most risky assets

Although we think that we have now passed this cycle’s peak in long-dated US Treasury yields, we still suspect that investors are underestimating just how far the Federal Reserve will raise interest rates, and how long it will be before inflationary pressures ease sufficiently for interest rate cuts to come onto the agenda. With that in mind, we think that the yields of most “safe” assets will end this year above their current levels. Meanwhile, given our relatively downbeat view of the global economy, we also expect most “risky” assets to see renewed declines, as risk premia climb and disappointing growth in corporate earnings undermines global equities. We think, though, that the outlook for most safe and risky assets is brighter in 2023 and 2024.

5 August 2022

Economic resilience may end the twin rally in bonds and stocks

After a few weeks of strong performance, “safe” and “risky” assets have both generally sold off today after the strong US payrolls data. We expect this to continue over the rest of 2022.

5 August 2022

What a Taiwan Strait crisis could mean for markets

While China-Taiwan tensions haven’t yet caused ructions in global financial markets, any escalation that threatened to disrupt trade and/or financial flows almost certainly would. This Update explores the potential ramifications of such an event across bond, equity and FX markets. Markets Drop-In (9th Aug): Chief Markets Economist John Higgins leads this 20-minute briefing on our latest quarterly Outlook reports from our Global Markets, Asset Allocation and FX Markets services. Register now.  

We think the latest asset price rallies will prove short-lived

We doubt the recent rallies in global bond and equity markets will be sustained over the remainder of the year. While we no longer think the 10-year US Treasury yield will exceed its June peak, we still expect it to rise as the Fed delivers a bit more tightening than investors now seem to anticipate. And we think government bond yields elsewhere will increase for similar reasons. We expect that, combined with a deteriorating economic backdrop, to place renewed pressure on “risky” assets; we forecast major benchmark equity indices – in both developed and emerging markets – to fall further this year, and expect corporate bond spreads to widen. But next year we think both “safe” and risky assets will fare a bit better, as central banks transition to easing mode and the economic backdrop starts to improve.

3 August 2022
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