Musings on Markets (Dated 26/06/2022)

Markets are becoming increasingly concerned by the potential for a recession this year. Macro shocks in the form of the Ukraine war & China’s covid resurgence have accelerated weakness, while inflation has started to feed through into slowing consumer demand. Evidence for more somber expectations of growth were reflected in consumer confidence & PPI numbers this week, while we have also seen commodities start to sell off on the back of expectations of lower demand.

There does appear to be some respite, in so far that macroeconomic weakness may force central banks to slow monetary tightening which has helped buoy markets towards the end of the week. 

On Thursday UK consumer confidence numbers were released, falling to -41, the lowest print since the 2008 crisis, reflecting consumer fears over the rising cost of living. PMI (purchasing managers index – a measure of new orders) numbers were also released on Thursday, stagnated as it fell to 50.8 – a level which has historically indicated a high likelihood of recession. The US reading was also weaker than expected, with the composite measure falling from 53.6 in May to 51.2 in June, lower than economist predictions of 53. UK CPI printed at 9.1% on wednesday, the Bank of England expects CPI to reach double figures by year end.

Commodity prices moderated this week, signalling that markets fear that ongoing monetary tightening will reduce demand for goods. Copper fell to a 16 month low this week, while WTI crude has fallen c.4% this week trading at $105/bbl. Falling commodity prices could act as a pressure value to take the heating out of rising prices, albeit this would likely come on the back of diminished demand (a recession).

In terms of Credit GBP, HY Corporates returned c.-99 basis points (bps) on the week, with Financials under-performing Non-Financials each returning c.-99 bps, and -98 bps respectively. In terms of rating, Double BBs returned -108 bps, whilst Single Bs and CCCs returned –77 bps and -158bps respectively.

At time of writing (Fri 27th, Afternoon) The FTSE is down c.1.05% on the week. GBP / USD is up 0.2% on the week at c.1.2275. The spread on the iTraxx Crossover (XOVER) – a proxy for the market’s assessment of credit risk (the greater the spread, the greater the perceived risk) decreased by c.9bps over the week to 533.