April was largely about war, global slowdown, China lockdown and Fed rate hikes.
The geopolitical dial turned further into the red over the past month. On the face of it, President Putin did not appear to be getting any weaker, yet his Ukrainian ambitions were somewhat stymied as he pulled back from Kyiv and north Ukraine to focus on a more focused, and possibly more manageable, southern front. His rhetoric has however been getting increasingly antagonistic and bellicose against the West.
A further worrying development that needs to be monitored are the closer ties between Russia and China. China ratcheted this up further on the 29th when describing the relationship as the ‘new model’ for the world, which certainly does not bode well. To all China watchers who felt that China would roll over and be pragmatic when it came to Western relations, given the bulk of its trade flows head to the West rather than Russia, are now not quite as confident in their position. It appears that the more the West goads China to take an opposing stance to Russia, the closer they look to stand with Russia.
On the other side of the fence, Europe and the United States appear to be increasingly unified, drawn together by similar concerns about energy, pandemic, economic recovery and confronting Russia. Even Germany, the top buyer of Russian energy since the war started, has said it is trying to break free from its over reliance on Russian energy, although it is now paying for Russian gas in roubles. Since the start of Russia’s invasion, Europe has frozen over €36 billion in Russian assets, which sounds impressive but is a relatively small number when you realise that Russia has been earning $9.6 billion in additional revenue in April alone from higher oil prices.
Inflation has become the real market concern. Driven by rising energy and food costs, US inflationary figures hit 8.5% in March, which is a four-decade high, while the euro zone was 7.4% in March, up from 5.9% in February and the UK’s was 7.0%, the highest in 30 years. Whether this inflation is transitory, i.e., short-term, or is here to stay has been much debated by central bankers and economists alike. But what is clear is that the immediate concern is hot inflation, which will result in hard-hitting central bank hikes, with the ECB expected to raise rates in July, while the Fed is expected to raise US rates by as much as 0.5% in May. Contracts tied to Fed policy rates are even pricing in rates of 3% to 3.25% by the end of the year.
China throughout April was largely dominated by the widespread covid lockdowns. Their draconian approach has been impacting spending, oil demand and supply chains. At the end of the month, factory activities dropped at a steeper than expected rate, with the official manufacturing PMI down by 47.4 in April from 49.5 in March. A Reuters poll had expected 48.
From the investor’s perspective, the outlook appears pretty depressing, with inflation and slowing growth the recipe for stagflation. A Bank of America survey revealed that 70% of fund managers expected the global economy to weaken over the next 12 months and an increasing number believe a recession is in the offing. These worries were reflected in the VIX, which spent much of April in the 20s (the average stands around 18.5%) and closed at over 33%, a 64% increase from where it started.
Equity markets were largely dominated by very material falls in US stocks, particularly in tech and growth stocks as investors concerns about slowing growth and interest rates unnerved markets. By the end of the month, the Nasdaq was down over 13% and the S&P500 almost 9%. A few of the key weighting stocks were particularly badly hit, including Netflix down 50% and Amazon down 25%. Beyond the US and equity market losses were more muted, with the Dax down 2.2% and the Nikkei down 3.5%, while the FTSE 100 was somehow in positive territory, only just, largely driven by the index’s exposure to commodity stocks.
In the bond markets, prices fell and yields rose. The US 10 year Treasury note saw its biggest monthly gain in 13 years as the market increasingly expected aggressive hikes and by the end of the month this stood at 2.9%. Investors are once more seeing yields as interesting, with the likes of Amundi, Morgan Stanley and Jefferies shifting to a more positive position on bonds. This was reflected in sizeable positive flows to government bond funds.
Commodity markets were less directional than they had been in the previous month but continued to be impacted by the goings on in China and Russia, with Europe relying on Russia for as much as a third of its energy needs. The Bloomberg Commodity Index was up 4.1%, with a few specific markets responsible for a large part of this move, particularly heating oil, natural gas and coal, up 28.6%, 28.1% and 25.5% respectively. After Gazprom suspended sales of natural gas to Poland and Bulgaria prices rose by as much as 20%. Oil prices fluctuated through much of the month and remained in a $94 to $108 range and only rebounding towards month end on China’s plan to support the economy, with WTI and Brent closing up 4.4%. Silver however had a month to forget, down just over 8% compared with gold down 2.2%, as industrial demand proved slow on supply chain disruptions.
Crypto remains an enigma. Untested/ untried in an inflation environment. Advocates say it is an inflationary hedge, yet it was heavily impacted by nervy investors and increasingly hawkish Fed. Prices steadily declined through the month with Bitcoin and Ethereum closing down around 15%. This was, in fact, the worst April in Bitcoin history according to data from Coinglass.