Sabco® Investment's Monthly Market Report - April, 2022

Sabco® Investment's Monthly Market Report - April, 2022

Equity markets faced challenges in April as rising interest rates and geopolitical tensions persisted.

During the past month, stock markets experienced significant declines across all regions. These developments intensified existing concerns, including higher inflation and costs for households and companies, rising interest rates, the war in Ukraine and energy supply issues in Europe, and China's slowing growth. However, company results for the first quarter were generally considered solid in both the U.S. and Europe.

European stock markets fared relatively better in local currency compared to other regions, while U.S. stock markets, particularly the S&P 500 and Nasdaq, performed weakly. Companies that had thrived during the pandemic, such as Amazon and Netflix, experienced losses. The rise in interest rates had a greater impact on U.S. stock market indices, particularly growth companies and technology stocks, due to their higher valuation and sensitivity to interest rate changes. Despite this, the stronger dollar helped limit the damage for European investors. Value stocks outperformed growth stocks in this environment, especially in the U.S.

Chinese stocks witnessed sharp declines in April due to concerns about economic growth. The Chinese government continued its "zero COVID" strategy and implemented new lockdowns in several cities, although the central bank introduced monetary support measures that helped stocks recover slightly towards the end of the month.

Bond yields continued their upward trend in the United States, with 10-year yields remaining just below 3%, and in Europe, where German 10-year yields hovered around 1%. While there were indications that inflation might reach its peak, it was expected to remain elevated compared to pre-pandemic levels. The drivers of nominal interest rates differed between regions, with rising real interest rates impacting the U.S. and inflation expectations influencing the euro area. This reflected variations in market expectations regarding the aggressiveness of central banks.

Interest rate spreads against Germany for other Eurozone government bonds increased significantly as investors adopted a risk-averse stance and anticipated reduced bond purchases by the European Central Bank (ECB). Italian spreads widened to nearly 200 basis points, reaching their highest level in over three years, while the increase in French interest rate spreads ahead of the presidential election was short-lived.

Corporate bond spreads widened again in April after narrowing in March, reflecting a more challenging environment.

Several central banks, including Canada, New Zealand, and Sweden, raised interest rates to address rising inflation. The Federal Reserve was expected to take another step towards a less accommodative monetary policy with a 50 basis points increase in May, and the reduction of the balance sheet by $95 billion per month was also under consideration. The European Central Bank acknowledged increased inflation risks and confirmed its intention to end its bond purchase program, potentially followed by an interest rate hike in the third quarter.

China's central bank reduced the reserve requirement ratio by 0.25% to facilitate credit extension but left its policy rate unchanged despite the growth slowdown, contrary to expectations.

The U.S. dollar strengthened further during the month, benefiting from its safe-haven status, a widening interest rate advantage over Europe, expectations of unchanged monetary policy in Japan, and the likelihood of more accommodative monetary policy in China.

The Chinese renminbi experienced a significant decline of over 4% against the dollar, surpassing market expectations. China's central bank adjusted the currency's daily trading range to offset the impact of the slowing economy.

The depreciation of the Chinese currency also affected other emerging market currencies beyond Asia.

In April, the Brent oil price saw fewer significant fluctuations compared to the previous month. Uncertainty surrounding Russian energy supplies to Europe and OPEC's cautious approach to increasing oil production limited price movements. China's growth slowdown and strategic reserve utilization, particularly by the U.S., also put a cap on oil price increases. European gas prices briefly rebounded after Russia halted gas supplies to Poland and Bulgaria but closed the month lower overall.

Industrial metals reversed the gains seen in March, ending April with a decline of 7.6% for the GSCI Industrial Metals index, primarily due to China's growth slowdown and lockdown measures.

Gold prices fell in April and struggled to sustain levels above $1,900 per ounce. The significant increase in bond yields, driven by rising real interest rates, had a greater impact than the traditional safe-haven appeal of the precious metal.