The combination of the uncertain path of the Ukraine conflict, heavy-duty lockdowns in China in response to the Omicron surge and rising bond yields resulted in sharp falls in volatile equity markets in April.
Global equities rebounded initially, but the rally ran out of steam given the continuing Russia/Ukraine conflict. The US Federal Reserve’s increasingly hawkish tone accelerated the rise of long-term bond yields. In this environment, equities fell by 8.1% in April (MSCI AC World index in US dollar terms), marking the largest decline since the 13.7% drop in March 2020 and sending the index back to its lowest since March 2021.
In some markets, it became clear towards the end of the month that investors were capitulating and preferring to hedge against further falls over repositioning themselves in the market.
Pandemic problems continue in China
Another element that weighed on investor sentiment was the imposition of tighter restrictions by Chinese authorities in response to the Omicron wave, and the risk of further lockdowns after the mandatory testing campaign in Beijing in late April. This hampered consumption and was seen as a risk to global manufacturing activity.
Against this background, the People’s Bank of China (PBoC) announced a widely predicted cut in its reserve requirement ratio (RRR). The poor short-term economic outlook, and the government’s desire to achieve its 5.5% GDP growth target for 2022, led the authorities to step up their measures to support economic activity and financial markets. These measures included those affecting digital economy companies, which had suffered from stricter regulation.
As a result, emerging market equities held up better than developed equities in April (-5.7% for the MSCI Emerging Markets index in US dollar terms).
Growth stocks suffer
One characteristic of recent equity market movements was the sharp underperformance of US indices, and more particularly growth stocks. These were hit hard by the sharp rise in long-term bond yields. Despite a reasonably favourable start to the earnings season (in terms of both earnings and sales), the S&P 500 index lost 8.8% over the month, while the NASDAQ index fell by 13.3%.
European and Japanese indices held up markedly better (-2.6% for the EURO STOXX 50 and -2.4% for the Topix). This was no doubt helped both by their composition – with large tech stocks having a lower weight than in the US – and by the depreciation of the euro and the yen against the US dollar.
A lively month in forex markets
The Fed’s more hawkish tone, the differential between the Fed’s policy stance and that of its peers, and risk aversion all helped to boost the dollar. Against a basket of currencies, the DXY index gained 4.7%.
Currencies of countries whose central banks raised interest rates in April, or that clearly stated they would do so soon, however, appreciated against the US dollar (Australian, New Zealand and Canadian dollars, Swedish krona and Norwegian krone).
The yen fell further in April (-6.2% against the US dollar, -3.7% for the real effective exchange rate). The decline was fuelled by the Bank of Japan (BoJ) reaffirming that it was maintaining a highly dovish stance.
A clear message in troubled times
The message from central banks to investors and economic agents is that they are worried about inflation and – more importantly – that they will fight to restore price stability.
While the uncertainties over the outlook arising from the Ukraine conflict have led to significant downward revisions of growth for 2022, the real concern is inflation, and its effect on consumer purchasing power and company margins. Here, central banks’ commitment could be reassuring, but for investors, the earnings outlook and rising interest rates will set the tone in coming months.
We believe that growth will slow and that inflation will fall (probably not immediately, but base effects will eventually reverse upward price trends). Moreover, despite the normalisation of monetary policies and the rise in long-term bond yields, financial conditions remain loose overall.
Poor visibility on factors such as the conflict in eastern Europe and the pandemic, especially in China, call for slightly more caution in the short term.