Data on US inflation for June were released last week. Rise of consumer prices accelerated further in the past month, with year-on-year rise of the Consumer Price Index (CPI) standing at 5.4%. Currently, inflation in the world's largest economy is well above the 2% inflation target of the US Federal Reserve. However, Fed and US administration officials have indicated in recent days that the elevated inflation will plague the US economy longer than originally expected and that it will certainly not return to the 2% inflation target in the coming months.
The broadest global stock index MSCI All Country World declined by 0.6% last week. The main US stock index S&P 500 declined by 1.0%. On the other hand, the Central European stock index CECEEUR recorded a modest gain of 0.5%.
Overall, global equity markets as a whole remain overvalued as my global valuation Z-Score reaches 2.3, which is still close to the all-time high. The average global equity valuation is thus currently around 2.3 standard deviations above the historical average, which is truly unprecedented. Therefore, I believe that equity returns will be rather below average in the next few years. The average annual equity returns, including dividends, over the next five years is unlikely to exceed 5%.
Bonds traded without major movements last week. The broadest global bond index, Bloomberg Barclays Global Aggregate Bond, recorded a slight gain of 0.2%, while the average global bond yield to maturity fell by 0.02 percentage point to 1.05%. However, in real inflation-adjusted terms, the average global bond yield to maturity remains deeply negative, currently at -3.1%. Negative real inflation-adjusted bond yields to maturity are referred to as the financial repression. The performance of corporate bond indices was also around zero.
As for my outlook on bonds, they are just as expensive as equities at the moment, and even more expensive than equities on the relative basis. Therefore, I believe that bond returns will be below average in the next few years compared to the historical trends.
Commodities did not do well last week either. S&P GSCI global commodity index fell slightly by 0.3%. The price of the barrel of the North Sea Brent fell by 2.6% to $ 74. Gold strengthened slightly by 0.2% to $ 1,815 per troy ounce.
US dollar strengthened last week. DXY dollar index, which measures the dollar's performance against a basket of other major currencies, strengthened by 0.6%. Against the euro, the dollar also strengthened by 0.6% to 1.181 USD EUR. Koruna strengthened last week. Against dollar, koruna strengthened by 0.6% to the level of 21.63 CZK/USD and against euro koruna strengthened by 1.0% 25.54 CZK/EUR.
Investment Strategist at Conseq Investment Management, a.s.