April global commentary: World markets retreat as risk appetite sours

Global markets had a miserable April, with the MSCI World Index having its worst month of a bad year (-8.3% MoM, -12.9% YTD) as tightening monetary conditions, the ongoing war in Ukraine, and worsening COVID-19 lockdowns in China rattled investors. S&P 500 companies began reporting earnings, with the 55% of companies reporting during April delivering earnings that grew slightly (c. 3% YoY) ahead of expectations (by c. 5%). Although we note that this did little to cheer investors, with management of companies continuing to highlight inflationary pressures and supply chain challenges.

US tech shares were amongst April’s biggest losers, with the tech-heavy Nasdaq 100 Index (-13.3% MoM) experiencing its worst monthly drawdown since 2008. Losses were particularly severe for the largest tech companies and the FAANG grouping of Facebook parent (Meta), Amazon, Apple, Netflix, and Alphabet, which saw their share prices fall by at least 10% MoM. This included a 24% MoM drop for Amazon, as its 1Q22 e-commerce sales fell and costs increased sharply, and a 50% plunge in the Netflix share price, as it saw subscriber numbers fall for the first time in a decade. Amongst the sectors, only S&P 500 staples companies were able to eke out a positive return (+2.6% MoM) as investors sought out the relative safety of non-discretionary spending categories.

Emerging markets (EMs) fared only slightly better (MSCI EM -5.6% MoM), thanks at least in part to a late-month rally in Chinese stocks as the government pledged support for economic growth, which has been hampered by severe lockdowns related to China’s “Zero-COVID” policy. Top Chinese leaders pledged to meet economic targets for the year and the People’s Bank of China cut reserve requirements for banks and vowed to increase support for the economy.

The ongoing conflict in Ukraine continued to weigh on energy prices, with the price of Brent crude oil remaining above US$100/bbl, while the price of natural gas (where the European Union [EU] is particularly reliant on Russian supply) jumped by 28% MoM to a level that is now almost double from where it started this year. Higher energy prices, along with ongoing supply chain bottlenecks, continued to stoke inflationary fears, and US March inflation data did nothing to allay those concerns, with headline inflation (+8.5% YoY) increasing for the sixteenth consecutive month. Expectations that the US Federal Reserve (Fed) will now be forced into aggressive monetary tightening continue to increase, with markets now priced for 1.5% of US rate hikes over the next three Fed meetings and investors expecting the US Fed funds rate to reach 3% by the first Fed meeting of 2023 – a level not seen since 2008.

Heightened expectations for monetary tightening pushed US 10-year government bond yields 0.6% higher for the month (to 2.94%) and drove the Bloomberg Aggregate Bond Index of global bonds down 5.5% MoM – comfortably the worst monthly loss for the index since its inception in 1990. Expectations that the strength of the US economy will allow the Fed to hike rates meaningfully above its developed market (DM) peers was also a key driver of US dollar strength, with the greenback ending the month significantly stronger against most currency pairs (euro -4.7% MoM, British pound -4.3% MoM, Chinese yuan -4.1% MoM). The relative weakness of the Japanese yen (-6.2% MoM, -11.3% YTD), was particularly stark, given the Japanese currency’s typical status as a safe haven, but the Bank of Japan seems intent on maintaining monetary support in search of inflation over supporting the currency.

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