Responding to the Fed’s ‘shock-and-awe’ approach

THE declines in Western equity and credit markets in the second quarter of 2022 in particular have reflected the rapid withdrawal of pandemic-era policy support from the global economy and the shock to global commodity supply chains, as a result of Russia’s February invasion of Ukraine and the associated sanctions placed on the country by the US-led coalition. This resulted in the “shock-and-awe” strategy adopted by the US Federal Reserve to prevent the de-anchoring of inflation expectations in markets. 

This strategy has supported our expectation of not only higher bond yields in the US but also a return to positive yields in the euro area outlined in our 2022 Investment outlook, as well as our expectation that the fixed income asset class would struggle to deliver positive returns in 2022. 

With the European Central Bank now joining the US Federal Reserve in a belated and likely rapid hiking of interest rates, the ECB faces the same loss in confidence in light of the surge in inflation in recent months, presenting the second stage of the shock-and-awe strategy now being pursued on both sides of the Atlantic.