Active Thinking

At GAM Investments’ latest Active Thinking forum, David Dowsett examines why markets are proving more resilient and the key indicators he will be looking at this week.

27 July 2022

At the moment, the markets are trading with quite some resiliency. Last week was a fairly strong week for US equities and USD 45 billion in US investment grade bonds was issued, marking a high for the year. Furthermore, it was the strongest two-week period for US high yield year-to-date.

There are two main reasons we are now seeing better performance after such a tough first half of the year, in our view. Firstly, investors are defensively positioned. The first half of the year has left its mark. This is shown in the Bank of America Global Fund Manager Survey which found that fund managers are as de-risked now as they were at the point of the Lehman Crisis in March 2009. A lot of risk has been taken off the table in response to the falls that we have seen and therefore, investors do not have a great deal more de-risking to do.

Secondly, the bond market is searching for when the Federal Reserve (Fed) might pause its hiking cycle. While we expect to see a 75 basis points (bps) hike this week, we are beginning to see an inverted curve and we are beginning to see euro-dollars price rates lower in 2023 than we will end 2022 with. As a result, for duration-sensitive assets, against the background of investors having de-risked, that is leading to some support. While we are not yet out of the woods, we could see more of this over the next few weeks. Markets are likely to display some resilience until September, in our view.

Emerging markets were the first section of the market into this sell off and they are showing considerable signs of being the first out of it.

Last week, we saw the European Central Bank (ECB) hike rates and the following day, the PMI data indicated that Europe was moving into a recession in June, with the consolidated number below 50. This highlights the policy challenge facing the ECB. For the moment, Italian bonds are stable and are likely to remain stable until September when we see more conclusive evidence of what the Italian government looks like.

This week, the focus will be on earnings data, with half of the S&P 500 Index and around half of the European companies reporting. This comes on the back of US financials reporting last week which showed that the US consumer is not in bad shape and signalled some resilience, supporting overall better sentiment in equities.

Markets will also look to the Fed meeting and the expected 75 bps rate hike. However, we do not believe that the central bank will reveal much about its intentions. It has been behind the curve for so long that it may not wish to highlight when it expects to end its hiking cycle. The market searches for any hints that the Fed is beginning to consider slowing the pace of hikes, which in this current environment would send markets higher again.