Sabco® Investment's Monthly Market Report - March, 2023

Sabco® Investment's Monthly Market Report - March, 2023

March was marked by significant stress in the banking industry, causing concerns among investors. Despite this, equity markets managed to end the month on a positive note, while bond yields experienced a notable decline. Central banks continued their efforts to tighten monetary policy without hesitation.

Equity markets had a positive month overall, despite the banking crisis that unfolded in mid-March. The collapse of Silicon Valley Bank (SVB) and other regional banks in the US, along with the bailout of Credit Suisse, triggered a shift in market sentiment. However, swift actions taken by authorities prevented the crisis from spreading to the entire financial system. Consequently, the impact on equity markets remained limited, with declines not exceeding 5-6% during the month. Although the banking crisis is expected to lead to tighter credit conditions and weigh on economic activity and corporate earnings, there is also a positive aspect. It reinforces the disinflationary trend, potentially reducing the extent of monetary policy tightening required by central banks. Market expectations currently favor this latter perspective.

At the sectoral level, the two opposing forces were evident. While the stock market indices remained relatively flat, different sectors had diverse performances. Cyclical stocks and the financial sector underperformed, while sectors benefiting from lower interest rates, such as technology, outperformed the market significantly.

Bond markets experienced a rush toward "safe" bonds as investors sought low-risk investments in the uncertain market environment of March. This shift in preference caused equity and bond prices to move in opposite directions for the first time since the start of the inflation crisis. After bond yields had risen in February due to positive economic data, they fell again in March. In the US, 10-year yields dropped from above 4% to 3.4%, and the German benchmark rate decreased from 2.75% to 2.10%. Shorter-term maturities, aligned with expectations for monetary policy, saw even more significant declines. US 2-year yields fell to 3.8% compared to over 5% at the beginning of March.

The turmoil surrounding the financial sector in March abruptly interrupted the trend of narrowing spreads of corporate bonds in euros. Spreads of financial corporates sharply increased by 75 basis points, nearly reversing the previous narrowing trend. However, the rise in non-financial corporate spreads remained contained, increasing by 25 basis points.

Central banks continued their efforts to tighten monetary policy during March. The Federal Reserve raised short-term interest rates by 25 basis points, with Chairman Powell acknowledging the potential impact of the banking sector stress on economic activity and hinting at the end of the tightening cycle. The median expectation of Fed members for this year remained unchanged, implying one more 25-basis-point rate hike. Market expectations increasingly lean toward rate cuts, despite Chairman Powell's statement that they are not currently on the agenda. The European Central Bank raised deposit rates by 50 basis points to 3%, surprising some market participants who expected a smaller increase due to the banking crisis. The lack of indication about future interest rate hikes was interpreted as a more cautious stance. However, President Lagarde's statement that inflation is expected to remain high for an extended period made it clear that policymakers anticipate the inflation battle is not yet won. The Swiss Central Bank also raised interest rates by 50 basis points to 1.5% to address renewed inflationary pressures, with the possibility of further hikes if inflationary pressures persist.

In the currency markets, the temporary strength of the dollar waned in March. The dollar had strengthened previously due to expectations of rate hikes by the Federal Reserve following favourable economic data. However, during the financial sector turmoil in mid-March, the dollar's safe-haven status only provided limited support. The decrease in interest rate expectations was more pronounced in the US compared to the eurozone, resulting in a resumption of the dollar's downward trend since October. While the banking crisis briefly sparked investor risk aversion, the safe-haven currencies Swiss franc and Japanese yen could only benefit temporarily. The swift actions taken by the Swiss National Bank minimized the impact of the Credit Suisse issues on the currency. Consequently, by the end of March, both the yen and the Swiss franc remained unchanged. On the other hand, the Norwegian krone continued to perform weakly due to lower oil prices, despite ongoing interest rate hikes.

Commodities faced a challenging month in March, influenced by the prevailing risk aversion stemming from the banking crisis and concerns about a potential recession if the situation worsened. Brent oil prices declined to $73 per barrel, reaching their lowest level since late 2021, driven by fears of reduced demand. However, in early April, OPEC+ surprised the market by announcing an unexpected production cut of over 1 million barrels per day starting in May, contrary to expectations of stable production levels. This announcement led to a rebound in oil prices, pushing them towards $85 per barrel at the close of March. Industrial metals experienced volatility throughout the month but ended up relatively unchanged overall. Factors such as recovering demand from China and low inventories provided support to the sector. Gold prices saw a notable increase, nearing the $2,000 per ounce mark once again. The more moderate outlook for interest rates contributed to a favourable environment for gold, and the uncertainties surrounding the financial sector boosted demand for the metal as a safe-haven asset.

In summary, March was a month dominated by stress in the banking sector, but equity markets managed to remain positive. Bond yields experienced a sharp decline as investors sought safer investments. Central banks continued their tightening measures, but the banking crisis raised expectations of a potential end to interest rate hikes. Currencies saw a temporary strengthening of the dollar, followed by a resumption of its downward trend. Commodities faced challenges due to risk aversion, with oil prices initially declining but recovering after an unexpected production cut announcement. Gold prices advanced due to a more moderate interest rate outlook and increased demand for safe-haven assets.