1. Central banks movements

The ECB, which has been by far one of the most reluctant central banks in developed countries to tighten monetary policy, raised interest rates by 50 basis points at its meeting on 21 July, more aggressively than it had initially planned. On the other hand, Lagarde advocated a “meeting-by-meeting” approach to further hikes, increasing her room for manoeuvre according to the evolution of economic data. On the other hand, the approval of the European anti-fragmentation instrument, technically called TPI (Transmission Protection Instrument), was also unveiled. This tool will allow the agency to buy debt from eurozone countries whose risk premium is soaring.

For its part, the FED meeting continued monetary tightening without surprising the market, as the increase in the price of money was set at 75 basis points. The institution set the interest rate at 2.25%-2.50% by unanimous decision, which is considered to be neutral for the US economy. Just as the ECB did, Powell signalled that they will not provide as clear guidance as before, acknowledging greater concern about the apparent slowdown in macroeconomic data.

2. Fear of recession exceeds fear on inflation

The bond market has been pricing in the increased probability that investors assign to a recession scenario. As a result, profitability on long-term global government bonds fell, with the US Treasury and the German Bund falling to around 2.66% and 0.81% respectively.

In the United States, the effective inversion of the 2-10 year treasury curve, a phenomenon known for its high reliability in predicting recessions, has been remarkable. Currently the 2-year maturity is paying 20 basis points more than its 10-year counterpart.

On the other hand, Italian bond profitability were particularly stressed by both the prospect of interest rate hikes in Europe and the resignation of Prime Minister Mario Draghi. The rating agency S&P downgraded the outlook on government bonds from positive to stable and the rebound in the country’s risk premium has been substantial.

3. Growth style regains ground

After a frenetic first half of the year, market sentiment in July has improved, giving a respite to the worst hit sectors of the year. With geopolitical and macroeconomic risks on the back burner, corporate results for the second quarter have managed to raise some optimism.

There has been some reversion to the mean by sector, with consumer discretionary and technology standing out positively and energy and materials on the other hand. Fears of a recession have dampened expectations of interest rate hikes, favouring companies with longer valuations, such as technology companies. On the other hand, small companies have outperformed larger capitalisations, contrary to what we have observed in the first half of the year.