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iBoxx ALBI Monthly Commentary: July 2022

U.S. Equities Market Attributes July 2022

S&P Kensho New Economies Commentary: Q2 2022

iBoxx Tadawul SAR Government Sukuk Indices – Q2 2022

iBoxx USD Asia Ex-Japan Monthly Commentary: June 2022

iBoxx ALBI Monthly Commentary: July 2022

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Kangwei Yang

Director, Fixed Income Product Management

S&P Dow Jones Indices

July 2022 Commentary

In line with market expectations, the Federal Reserve raised its key benchmark rate by 75 bps in July—its second increase of this magnitude in consecutive months and its fourth hike this year. With the Hong Kong dollar pegged to the U.S. dollar, the Hong Kong Monetary Authority (HKMA) acted swiftly after the announcement and raised its base rate by the same margin (75 bps). Other Asian central banks also tightened their monetary policy over the past month, including the Bank of Korea (up 50 bps), Bank Negara Malaysia (up 25 bps), Bangko Sentral ng Pilipinas (up 75 bps) and Monetary Authority of Singapore (via raising the mid-point of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band).

The S&P 500® recorded strong gains in July, up 9.11%, outperforming U.S. Treasuries (proxied by the iBoxx USD Treasuries), which returned 1.70%. U.S. TIPS (represented by the iBoxx TIPS Inflation-Linked Index) climbed 4.58%.

It was a good month for Asian fixed income as well. The iBoxx Asian Local Bond Index (ALBI) (unhedged in USD) gained 1.21%, supported by gains in all eligible underlying markets in local currency terms. This was despite FX losses against the U.S. dollar in all but two markets—
namely Singapore and Indonesia. South Korea was the top performer (up 4.42%), while Malaysia (up 2.58%) and Thailand (up 2.48%) were a distant second and third.

Looking at different maturity segments, it was largely a sea of green except for short-to-medium dated Indonesian government bonds. Bonds at the long end of the curve generally performed better, with South Korea 10+ Year (up 8.11%), Hong Kong 10+ Years (up 5.82%) and Thailand
10+ Years (up 5.18%) scoring the highest performance in July.

Yields (in semiannual terms) declined in all markets except Indonesia in July. As a result, the average index yield dropped 25 bps to 3.98%. The largest change came from South Korea (-46 bps), which offered an average yield of 3.07% as of July 31, 2022. India remained the highest-yielding bond market in the index, offering 7.42%, while China Onshore (2.91%) was the lowest-yielding market.

 

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U.S. Equities Market Attributes July 2022

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Howard Silverblatt

Senior Index Analyst, Product Management

Key Highlights


- The S&P 500® was up 9.11% in July, bringing its YTD return to -13.34%.
- The Dow Jones Industrial Average® gained 6.73% for the month and was down 9.61% YTD.
- The S&P MidCap 400® rose 10.75% for the month, bringing its YTD return to -11.59%.
- The S&P SmallCap 600® was up 9.93% in July and had a YTD return of -11.54%.

U.S. Equities
July 2022 - Exhibit 1

Market Snapshot

Earnings pushed back the bear in July, with the S&P 500 ending the month up 9.11%, its best month since November 2020’s 10.75% gain. Ironically, concern over earnings was what pushed stocks down in June (-8.39%) to kill the bull and secure the bear’s place. Specifically, while earnings for Q2 2022 were expected to increase 13% over Q1, the whisper numbers were much lower, as was the concern over the second-half guidance. However, actual earnings (72.1% reported) did not make the expected 13% gain and now indicate a 7% gain, which is a headline disappointment for some, but not if you were one of those money managers (or traders) who traded into the whisper numbers (and sold). For them, it was an unexpected beat and a time to reallocate, as consumer spending continued (with Q2 sales potentially setting a new record and margins increasing). Similarly, guidance indicated expectations for a weakened Q3 (via inflation, higher interest rates and a strong U.S. dollar) and the word “recession” is now in the eyes of the dictionary after Q2 2022 GDP posted -0.9% and Q1 posted -1.6%. Q4’s guidance (to date) is more general and filled with concerns, but with a tone of “we can get through it” (almost as if it was written by the sell side), as hopes for a 2023 recovery (now including an FOMC interest rate increase) came back to create optimism (and buys). Adding to that new optimism was a new dovish U.S. Fed and Chair Powell (tough now, easy later), even as the Fed stuck to its script, increasing another 0.75% this month. It scripted another increase in September, but teased about the rate, turning to the time-tested phrase “data dependent” for the actual amount. To the Street, the read was a Fed that would (most likely) raise another 0.75% at its Sept. 20-21 meeting, but then pull back with lower increases (at the Nov. 1-2 and Dec. 13-14 meetings), with some speculation (hope is eternal) of a 2023 mid-year reduction. 

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S&P Kensho New Economies Commentary: Q2 2022

The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution

Global equity markets had a lackluster second quarter this year as they navigated a challenging macro environment. The S&P 500® was down 16% this quarter, posting the worst first-half performance since 1970, with three of its constituent sectors also having their worst first-half performance on record. Other major indices focused on U.S. small-cap equities, global equities and emerging market equities also had multi-year record losses during this first half. The story in the fixed income space was similar, as the Fed's tightening cycle switched into high gear after a 75 bps overnight rate hike in June, the biggest hike since 1994. The speed of rising rates has weighed heavily on the bond and credit markets, as various global and emerging market bond aggregates posted their worst first-half declines on record. The knock-on effects of rising rates, together with soaring inflation, pulled growth equities lower. The Q2 underperformance of the S&P 500 Growth versus the S&P 500 Value (-9.5%) was the worst since 2001, and so was the S&P 500 Growth's underperformance versus the S&P 500 (-4.7%). To round off this broad pullback across various market segments, consumer sentiment also fell sharply due to growing concerns of a recession ahead, despite a strong labor market. This combination of uncertainties, especially around underperforming growth equities and downcast investor expectations that S&P Kensho Indices are particularly sensitive to, was a recipe for a difficult Q2 2022.

TOP THREE FROM ACROSS THE NEW ECONOMIES

Clean Energy (-7.7%): KENERGY, which focuses on clean energy production at a utility scale, has had a volatile year so far, similar to the oil complex. After posting one of the best Kensho subsector returns in Q1 2022, it reversed those gains in Q2, while still holding the top spot as the best quarterly performer among Kensho subsectors. Its overweight in Utilities adds a defensive characteristic that likely helped its performance during this market pullback. Despite the recent swings, KENERGY has been relatively stable and rangebound over the past year, and it is now close to its level from one year prior. Brazilian electric company EBS was the top contributor, primarily because of strong investor demand as the company takes steps to go private. Azure Power and Enel Americas were the index’s biggest underperformers, with no clear stock-specific catalysts to highlight.

Smart Borders (-9.4%): KDMZ, focused on securing borders and critical infrastructure, drifted sideways, ending the quarter nearly flat compared to late January levels. Given the heavy weight of Industrials (~40%) within the index, the chorus of reports of an impending recession have likely weighed on its performance. Griffon Corp, a top performer, had a solid Q1 2022 earnings season that beat consensus analyst estimates and saw its stock gain 37% over the week following the announcement, ending the quarter up 40%. Teledyne Tech was the biggest quarterly underperformer in the index (-20% in Q2 2022), erasing its gains from the brief pickup in the aftermath of the start of the conflict in Ukraine. Embraer was another notable underperformer, not helped by a weak Q1 earnings report, losing 31% in the quarter and now close to a one-year low.

Space (-10.7%): After moving within a narrow price range since December 2020, KMARS trended lower for most of the quarter, eventually falling below this range. Rising rates have likely affected the bottom line of this innovative industry as it navigates its relatively early stages of growth. Failed payload delivery added to the woes of Astra Space, which has been plagued by investigations, driving its stock price 65% lower this quarter. Geospatial intelligence firm Maxar was another notable underperformer, registering a return of -33% for the quarter, retracing the bounce in the aftermath of the start of the Russia-Ukraine conflict in February. Northrop Grumman and Aerojet RocketDyne were the top positive contributors to the index performance. Despite Lockheed's deal to acquire Aerojet being scrapped in February, a strong Q1 earnings report and upbeat sales have been supportive for Aerojet's stock price.

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iBoxx Tadawul SAR Government Sukuk Indices – Q2 2022

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Paulina Lichwa-Garcia

Associate Director, Fixed Income Indices

S&P Dow Jones Indices

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Florian Guth

Principal, EMEA Fixed Income Indices

S&P Dow Jones Indices

iBoxx Tadawul SAR Government Sukuk Index

While the iBoxx Tadawul SAR Government Index continued its negative performance in April and May, the returns started to recover in mid-June.  The big shift came after the Federal Reserve announced the biggest interest rate hike since 1994 (up 75 bps) on June 15, 2022.  This major Fed policy change alleviated inflation fears and helped the long end of the sukuk curve stage a recovery.  The long end of the sukuk curve registered the highest change quarter-over-quarter, while the short end of the sukuk curve performed better in a month-to-date comparison.

iBoxx Tadawul SAR Government Sukuk Indices – Q2 2022 - Exhibit 1

iBoxx Tadawul SAR Government Sukuk Indices – Q2 2022 - Exhibit 2


iBoxx USD Asia Ex-Japan Monthly Commentary: June 2022

June 2022 Commentary

Economic headwinds from high inflation and the impact of monetary contraction policies continued to pressure financial markets in June. In the U.S., investor sentiment shifted after the Federal Reserve delivered a rate hike of 75 bps, a significant increase not seen since 1994. The underlying narrative has broadened from concerns around high inflation and aggressive rate hikes to also include growth worries and recession anxiety. The 2s10s spread of the U.S. Treasury curve flattened dramatically in June, perhaps reflecting an outlook for weaker economic growth on the horizon. Both stocks and bonds in developed markets declined this month.

The iBoxx USD Asia ex-Japan Index dropped 2.28% in June and 10.2% YTD. Moreover, the index yield rose 0.52 bps to 5.83%, and the index spread widened 32 bps to 273 bps. Additionally, the cost of hedging this market from credit defaults, as tracked by iTraxx Asia exJapan Index (5Y), has risen to levels last seen in April 2020.

This month, negative performances were generally observed across maturity buckets. While the investment-grade (IG) and high-yield (HY) subindices fell in the red, the IG subindex outperformed its HY counterpart by 0.75%. Notably, losses increased in severity when descending from the BBB segment into the HY rating segments.

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