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Thursday 28 July 2022
Global Investment Views, Equity, Fixed income
August 2022 | The double bear markets (in equities and long-term bonds) have nearly adjusted to the end of easy money and the ongoing rising inflation. We are shifting focus from fears of inflation to the deceleration of growth. Earnings expectations have room to go down, and the dollar rally could continue.
01 | Amundi Institute Insights: Financial markets expect central banks to tame inflation, but could be misjudging how long it will take economies and consumer prices to respond to increases in interest rates.
02 | Fixed Income: Yields are caught between inflation and recession fears. Investors should consider more quality- oriented credit but not de-risk portfolios.
03 | Equity: Rising volatility, falling prices and policy tightening in the face of high inflation should lead to a balanced stance for investors, with a focus on resilient regions, such as the US and China.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of July 28, 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
Markets have seen some recent relief in a year that overall is likely to be remembered as among the most challenging for investors. This recent market move has been supported by an alignment of stars on various fronts: (1) US inflation on a downward path, wherein we believe the market rally and the exuberance is excessive, as the Fed will remain focused on the inflation target and it is too early to claim victory there; (2) The earnings season was bad but not as bad as feared; (3) China’s COVID-19 policy relaxation, which has happened earlier than expected, but full reopening will be in 2024; and (4) Geopolitical uncertainty, with regard to which there has been some pause after elections – in the US, the mid-terms saw no major surprises and were quickly digested by the market, which reacted well to a divided government that should deter populist policies.
Central banks are working out how far they should go in terms of their aggressive tightening talk. The strong job market does not support a shift in stance from the Fed; while signs of moderation are emerging in wage growth, it remains above pre-crisis trends, and inflation is persistent and challenging. While the peak in US inflation is likely behind us, recent data confirm that core inflation remains sticky. Financial conditions are tight, but could become even tighter as the Fed’s risk of overshooting remains high. Globally, questions over long-term debt sustainability come at a time when markets are clearly addicted to central bank liquidity. As we saw in the UK, the miscalibration of fiscal and monetary policies can force a central bank to step in.
Inflation remains in the spotlight: the latest US reading was concerning, causing yields to rise while equity markets tumbled. Looking ahead, we confirm the outlook of slowing US inflation, but we think central banks, including the Fed and the ECB, will remain hawkish. Meanwhile, the economic outlook could deteriorate, as the US faces an extended period of sub-par growth and the outlook for the Eurozone appears gloomier, compounded by the ongoing energy crisis.
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