The summer period had ultimately been positive overall for the financial markets thus far, despite a still difficult macroeconomic situation, for several reasons. First, the perception by financial players of a lower inflation risk linked to a drop in commodities prices, particularly the price of the barrel of oil. This logically resulted in a widespread drop in sovereign rates, both on nominal rates, but also, and especially, for real rates. In our view, this played a key role in the risky assets’ good performance until recently. Moreover, the market positioning, which was very pessimistic in June, and a good earnings season that was deemed satisfactory also undoubtedly contributed to renewed investors’ risk appetite.
However, the macroeconomic situation remains at least difficult, especially in Europe. Consumer confidence is close to bottom in almost all Eurozone countries, in connection with the sharp rise in energy prices since the beginning of the year. In Europe, although the price of the barrel of oil fell back over the summer, this has not been the case for gas prices, which have jumped by more than 200% since the beginning of June. As a corollary, electricity prices continue to rise, with consequences for individuals and businesses that are currently difficult to assess due to the various government support plans in place. But is this fiscal support sustainable? The latest announcements suggest that, although this support will not disappear, it will at least be reduced, resulting in a potentially significant rise in energy costs for all economic players. A reform of the electricity market in Europe could also limit the shock.
Thanks to US energy independence, the same risks do not weigh on US consumers. While the latter are also affected by high inflation, they are also supported by higher wage growth than in Europe and a still buoyant labour market, although some signs of weakness are beginning to appear.
China does not have inflation-related problems, but this does not make its situation more reassuring. The policies implemented in 2021 to rebalance certain segments of its economy continue to have a profound impact on the economy in general, and particularly on real estate. At the same time, the economy is also suffering from the government’s zero-covid policy.
In this context of continual downwards revisions of the global growth forecasts for 2022 (4.40% at the beginning of the year, 2.90% as of 19 August), the central banks nevertheless have no possibility of easing financial conditions. While the latest US inflation figure, which came out at zero month-on-month for July, was reassuring in the short term, we believe it is far too early for central banks to be satisfied with the current situation. The latter reaffirmed in Jackson Hole their desire to fight inflation by being less accommodating and by raising real rates.
Beyond the geopolitical risks, for which the future is uncertain by nature, it is undoubtedly the last point that makes us the most cautious for the coming months. It will be hard for the upcoming tightening of financial conditions to go smoothly in a context of deteriorating growth. We believe it is important to remain cautious in our allocations to risky assets, especially in Europe.
To end on a hopeful note, however, it is possible that the end of the year will bring some good news with a gradually lower inflation in the United States and a positive impact of the various Chinese stimulus plans.