Another tricky and turbulent month for investors. While there were bouts of movements in the opposite direction, it was a case of equities down, bonds down, commodities steady to firmer, US dollar strong. An end of month rally in risk assets ensued after China vowed to stimulate the domestic economy, some big US tech names beat estimates on earnings and pessimism became over-stretched.
The debate about how high inflation would go, the outcome of the war in Ukraine and its impact on commodities and the impact of Chinese lockdowns vexed investors in April. As the second half of April witnessed the Q1 2022 reporting period for US companies, there was heightened anxiety regarding their outcomes.
Mixed Messages
Earnings season came at the end of April with eyes fixed on the US. The outcome was mixed but perhaps better than expected overall given the negative sentiment enveloping markets.
Netflix and sell
Alphabet (Google) down despite a US$70 billion share buyback announcement
Meta (Facebook) was better, as were Apple (US$90 billion share buyback announcement) and Paypal.
But miss on earnings forecasts or subscriber numbers and share prices took a hit viz Netflix and Teledoc to name but two.
According to Credit Suisse, 50% of the S&P500 reported Q1 2022 earnings with 76% topping estimates.
Strong Dollar
After long periods of being the least volatile asset class, currency moves in April were significant. A beneficiary of recent market uncertainty and volatility has been the US dollar. As the following chart of the US Dollar Index (DXY) from TradingView shows, the US currency has strengthened this year versus other major currencies.
Source: TradingView
The following six currencies are used to calculate the DXY:
Under Arrest – Bonds found a bid towards the end of the month
Government bond yields’ seemingly inexorable march higher arrested as the following chart of UK ten-year government bonds (gilts) from Investing.com, illustrates. After a steep ascent from the lows of late February this year, fears of a global growth slowdown attracted buyers when ten-year gilts touched 2% and US Treasuries flirted with 3%.
Source: Investing.com
Credit spreads widened on the month, reflecting a risk-off mentality in corporate debt.
Cracked China
Lockdowns as China grapples with its zero tolerance Covid policy and low vaccination rates rippled into a global growth slowdown fear. State authorities offered support in the final week of April and the PBOC cut rates by 25 bps.
Tough Talk
In general, April was an uncomfortable one for investors. Recession concerns, stagflation worries and an eye on events in Ukraine caused significant uncertainty throughout April. President Macron’s re-election as French president was something of a non-event for European markets although the turnout was low.
Further unsettling investors was the continued tough talk on inflation from the US Federal Reserve. Fed funds are set to peak at 3% in a year’s time and Fed governors have been highlighting the problem of curbing inflation, especially given the supply shortages that abound.
Having made a policy error in 2021 by being too accommodative in monetary policy for too long, the US Federal Reserve and other central banks, notably the Bank of England, need to get it right in 2022.
Raising interest rates into a slowing economy to slow high inflation is a tricky feat to pull-off. The runway to achieve a soft landing is shrinking.
At the end of the month, US gross domestic product (GDP) numbers were released; the negative 1.4% annualised versus an estimated positive 1% was something of a surprise. Consumer and business sentiment in developed markets has either peaked or is plummeting in the case of consumers. One of the reasons for the surprise US GDP number was a prior build-up of inventories, possibly to offset expected supply shortages.
Delivery times would appear to be falling. Labour scarcity plus a cost-of-living hit would appear to be attracting people back into the workforce. With US thirty-year mortgages above 5%, a slowing down of house price inflation might be expected.
So, markets oscillate from recession to stagflation to muddling through scenarios. Europe and the UK look closer to recessionary outcomes than the US where the consumer balance sheet still looks reasonably healthy after the US’s pandemic responses.
Whatever it Takes
In Asia, Chinese zero-tolerance policy on Covid hasn’t worked but the authorities will do what it takes to resuscitate growth. US dollar strength initially focused on a weak Japanese yen but the Chinese renminbi has also fallen which would aid Chinese exports – when they can ship them from congested ports.
Of course, the theme for the foreseeable future is to be less reliant on imports from doubtful counterpart countries resulting in more onshoring plus food and energy sourcing security. The by-product of this should be a naturally higher rate of inflation in developed and developing countries.
Supply Shock to Demand Shock?
Inflation rates have soared due to major supply shock as economies re-opened and found a lack of skilled and unskilled labour plus a shortage of key inputs. Demand exceeded supply equalled rising inflation. Just when the supply of key inputs might be improving, Russia invades Ukraine causing further supply shocks. The question for policymakers is, will rising prices cause a demand shock? Possibly, and in that case, will all the rate hikes priced into futures markets, actually happen?
What we do know is that the UK, and especially the US, central banks are not likely to hold back on rate hikes in the immediate future, keen to front load official rate increases to re-establish credibility.
Ukraine
Putin’s desire to trumpet a successful campaign/victory in time for the 9 May parade in Moscow to celebrate the anniversary of the capitulation of Nazi Germany in 1945 probably means an escalation of hostilities in Ukraine and friction with the West.
Summary
Financial markets will rightly remain nervous in May with much to ponder. Valuations need careful consideration and a balanced, resilient portfolio seems appropriate in the circumstances.