US inflation figures exceeded the worst expectations and triggered a rout in bond markets, in turn triggering a further sell-off in equities to new lows for the year.

Late May and early June had seen a modest recovery in stock markets, but this was reversed rapidly after the inflation data, taking the US indices down by more than 20% for the year and more than 30% for the NASDAQ. Other markets followed suit though the falls were a shade less dramatic.

The US Federal Reserve is now widely expected to raise rates by 75bp this evening (to 1.75%), accompanied by some hawkish commentary, as Jerome Powell attempts to restore the Fed’s inflation-busting credentials. Further increases are expected over the course of the year, as reflected in US two-year bond yields currently at 3.3%. The European Central Bank and the Bank of England face similar problems, the latter is expected to raise rates again on Thursday, the Bank of Japan is in a strange place, defending low rates and watching an on-going slump in the yen, now down by 17% against the US dollar over the year.

Weakness in some stock prices has been dramatic. Meta Platforms (Facebook!) sank again and have now fallen by more than 50% over the year, Tesla are now down by 38% over the year, shareholders must be so pleased to witness the shenanigans over Elon Musk’s bid (?) for Twitter. The other car companies showed some contrasts, Nissan Motor gained 9% (but look at the fall in the yen) while Ford fell 10% taking their stock down by nearly 40% for the year, one has to wonder does anyone really want to buy those huge ‘RV’s with petrol (gasoline) at over $5 per gallon.

Apple sank 10%, as did Amazon, amid general tech weakness, which saw Intel down by 13%, Alphabet and Microsoft fared a shade better. ‘Defensive’ names also struggled, notably Walmart, which fell 19% after poor Q1 figures and warning over higher costs. Nestlé fell 12% and Procter & Gable by 13%, worrying about these companies’ ability to pass on input cost increases.

There were few positives to report. Oil stocks edged higher with another increase in oil prices as did some of the miners, notably Anglo American and BHP Group. US bank stocks weakened, JP Morgan, Morgan Stanley and Goldman Sachs down between 4% and 8%, but a number of the UK and European financials moved better with the higher rates, notably the UK banks, Barclays, HSBC and Standard Chartered. Credit Suisse was the exception with further falls, they have now lost a third of their market value this year.

US stocks have de-rated at a lightning pace as shown on the chart below. The odds of a recession in America next year are increasing rapidly as the Fed ramps-up rates and the housing market cools rapidly in response, which must put pressure on earnings. But I do wonder if much of this hasn’t been priced-in now, which also appears to be the case in bond markets where two year rates have already reached what is expected to be their ‘terminal rate’. We shall see…


The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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