Rising fears of recession gripped global markets as the Fed responded to May’s higher CPI report by stepping up its efforts to bring intensifying inflation under control. The knock-on effects on prices and supply chain disruptions continued, driven by Russia’s invasion of Ukraine and renewed COVID lockdowns in China, intensifying inflation worries even as signs of weaker global growth emerged. This unpleasant combination of events led to a particularly brutal first half in global financial markets. Equity markets fell sharply during the second quarter, after experiencing smaller declines in the first quarter, pushing stocks into bear market territory. Declines in bonds were also substantial—the biggest drawdown since 1990—as the bond bear market continued to roar. With central banks turning ever-more hawkish in their quest to tame surging inflation, yields across the curve surged even higher after their brutal rise in Q1. So long as markets remain gripped by the dual headwinds of intense geopolitical tensions and stepped-up central bank hawkishness, we expect risky assets to remain under pressure.
