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Monthly Capital Market Monitor – April 2023
In April, risk asset returns in developed markets were mostly positive, while defensive assets also provided modest gains. Emerging market equities declined on weakness in Chinese stocks.
News flow during April was fairly quiet until the last week of the month when banking concerns resurfaced, as First Republic Bank came under pressure and was ultimately acquired by JP Morgan. Equity market volatility ended the month at its lowest level since late-2021, despite a brief spike during the last week of the month. Major economies remained resilient, driven largely by service activity. US GDP for Q1 rose at a 1.1% annualised rate, below expectations. Consumer confidence remained on the rise and labour markets remained tight, in spite of high profile layoffs in the US.
Headline inflation continued to decline in major economies, reaching 5% in the US, which is its lowest level since mid-2021. In the UK, inflation fell by less than expected and remained above 10%, the highest rate in major developed economies. Monetary policy remained tight but none of the major central banks made policy decisions in April. The People’s Bank of China and Reserve Bank of Australia left key lending rates unchanged. For the Bank of Australia, this was the first pause in their hiking cycle since the spring of 2022.
There was plenty of geopolitical news flow. Russia and Ukraine appear to be gearing up for spring offensives, while the relationship between US and China continued to show signs of stress. The US appears headed for a debt ceiling showdown over the near-term. However, none of the geopolitical news had major market-moving impacts.
US regional banks remained under pressure as First Republic Bank’s Q1 results were worse than expected with significant deposit outflows during the quarter. Shares plunged during the last week of the month. In the end, First Republic was acquired by JP Morgan following a bidding process over the last weekend of the month. Additionally, recent earnings reports show that banks are adding to loan loss reserves in anticipation of commercial real estate related write-downs. We’re starting to see signs of cutbacks in lending, but so far it does not appear to be a full blown credit crunch.
Equity returns ranged from single digit increases to modest declines, depending on region, market cap and style. Bond returns were generally positive, as yields experienced little change. Credit spreads in the US declined slightly. Inflation expectations in the US, as measured by the 10-year inflation breakeven rate, fell from 2.3% to 2.2%.
US dollar performance was mixed over the quarter, it weakened significantly against Swiss franc, euro and sterling but strengthened materially against Japanese yen and Australian dollar.
Commodities overall declined slightly during the month. Oil prices rose modestly and finished the month at almost $77, supported by OPEC’s announced production cut. Wheat prices on the other hand plummeted in April.
Mercer's Monthly Market Monitor provides an overview of global financial markets.
Risk assets propped up by hopes the Fed will take its foot off the brakes
Global equities rally for the second month in a row
Bond returns strong as rates and credit spreads fall
US dollar weakens materially, crypto collapses, commodities strong in risk on environment
Quarterly Market Environment Report Q1 2023
Global markets moved higher during the quarter as investors appeared to remain hopeful for a soft landing. However, volatility was elevated at times as stresses in the banking sector and uncertainty over monetary policy weighed on markets.
Treasury yields generally finished the quarter lower than where they started the year, as markets repriced the outlook for monetary policy following the banking scare. The 10-year Treasury yield reached 4.1% in early March, but ended the quarter at 3.4%.
The Bloomberg Aggregate Bond Index rose 3.0% in Q1, while the MSCI ACWI index rose 7.3%. During the first quarter, a traditional 60/40 portfolio rose 5.6%, but it remains down 6.1% over the past year.
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