The Cambridge Weekly – 20 June 2022

Linchpin oil price

As central banks around the world were busy reasserting their authority and credibility as the guardians of monetary stability, the previous week’s stock market wobble turned into a fully-fledged rout last week. The growth concerns that preoccupied investors morphed into fears that central banks have become so determined to stop inflation from embedding itself that they are prepared to accept that proceeding with monetary tightening countermeasures may indeed lead to a global recession.

Bond market gyrations

As regular readers will be aware, bond markets have been in flux this year. Yields have risen substantially in most major markets, on the back of rapid inflation and suddenly higher guidance on interest rates from central banks. This has clearly damaged the valuation metrics for equities, shifting up the ‘risk free’ rate of return and making stocks less attractive by comparison. In a separate article, we cover the latest updates from the world’s central banks – all of which will have substantive implications for global bond markets. Here though, we take more of a deep dive into the outlook for bonds and the potential effects of the changes on the economy. Following the substantial pains of 2022 for bond holders so far, will the year continue as it has started?

Central bank watch

Sometimes it feels like markets are little more than central bank watchers. Thanks to a series of high-profile meetings, and some headline-grabbing policy changes, last week was one of those times. We saw interest rate hikes in the UK and US, an emergency meeting at the European Central Bank (ECB) and some poorly received comments from the Bank of Japan (BoJ) governor.