Equities

Global equities (-6.5%) plunged during the month, ending April with a 10.8% loss year to date. Equities posted their worst monthly return since March 2020 as investors grew increasingly concerned about the economic toll of persistent geopolitical instability, soaring inflation, rising interest rates, and deteriorating supply chains. Energy prices continued to rise as the ongoing crisis in Ukraine put pressure on supplies. Russia halted gas flows to Poland and Bulgaria, causing European natural gas prices to surge. Germany confirmed that it supports a European Union (EU) embargo on Russian oil, but stipulated it must be gradual, increasing the likelihood that a ban will be part of the next EU sanctions package. Even as annual inflation accelerated to 17.6% in April, the Bank of Russia cut its key interest rate to 14%, from 20%, in an effort to support the country’s faltering economy. Despite the risk of slowing economic growth, most global central banks continued to adopt tough policy measures to rein in inflation, with the US Federal Reserve (Fed) and European Central Bank (ECB) reiterating their intentions to increase interest rates more aggressively and scale back pandemic-era stimuli. Hawkish rhetoric by global central banks was met by a sharp rise in yields, with the yield on the US 10-year Treasury approaching 3.0% — its highest level since late 2018. In China, lockdowns in Shanghai and restrictions in Beijing constrained supply chains as rising COVID-19 case counts disrupted production and kept workers at home. French President Emmanuel Macron was reelected, defeating far-right candidate Marine Le Pen by a wide margin.

US
US equities (-8.7%) suffered their largest monthly loss since March 2020. Risk sentiment was stifled by multiple factors, including the Fed’s aggressive policy shift, persistent pressures on supply chains and inflation, and geopolitical risks from the war in Ukraine. Growth stocks significantly underperformed their value counterparts. The Nasdaq Composite Index registered its largest monthly decline since October 2008 amid surging Treasury yields and disappointing earnings results from some of the biggest technology companies. Skyrocketing energy and food prices and strong consumer demand propelled inflation to a four-decade high; the headline Consumer Price Index (CPI) increased 8.5% annually in March (6.5% at the core level). Fed Chair Jerome Powell signaled that the Fed is likely to raise interest rates by 50 basis points (bps) in May and formally announce plans to begin reducing its US$9 trillion balance sheet, as the bank accelerates efforts to slow economic growth enough to temper inflation without tipping the US into recession. US GDP declined at a 1.4% annual rate in the first quarter, driven by pandemic impacts, a widening trade deficit, and lower government spending and inventory investment by businesses. Of the 55% of companies in the S&P 500 Index that have reported first-quarter earnings results, 80% reported earnings that exceeded forecasts. In aggregate, earnings were 3.4% above estimates, below the five-year average of 8.9%. The blended year-over-year earnings growth rate for the index was 7.1%, and the forward 12-month price-toearnings ratio stood at 18.1.

Despite the disappointing first-quarter GDP reading, most US economic data released in April signaled that the economy remained on a firm footing. Ongoing strength in the labor market underpinned the Fed’s belief that the US economy is strong enough to withstand steeper rate hikes in 2022. Receding COVID cases, dwindling savings, and higher wages spurred a greater number of workers to rejoin the workforce in March, as the unemployment rate dipped to 3.6% and nonfarm payrolls rose by 431,000. Nonfarm payrolls in the prior two months were revised upward by 95,000. In March, the total number of jobs was 1.6 million lower than pre-pandemic levels, while average hourly earnings rose 5.6% annually. A sharp drop in initial jobless claims in April provided additional evidence of an extremely tight labor market. Consumers remained resilient in the face of higher inflation, helping to keep recession fears at bay. Greater outlays on services caused consumer spending to accelerate 1.1% in March compared to a month earlier, significantly higher than expectations of 0.6%, although retail sales moderated amid surging gas prices. The Conference Board Consumer Confidence Index ebbed slightly, but remained high, with labor market optimism outweighing inflation fears. A rapid increase in mortgage rates and soaring home prices fostered angst about the housing market. Homebuilder sentiment slipped to a seven-month low in April, and new-, existing-, and pending home sales declined in March. New home construction in March unexpectedly rose to its highest level since 2006, as builders sought to replenish low housing inventory.

The expansion in US manufacturing unexpectedly slowed in April, as slumping demand and supply conditions drove the Institute of Supply Management (ISM) Manufacturing Index down to 55.4, from 57.1. In March, the services sector continued to enjoy a robust expansion, with the ISM Services Index rising to 58.3, from 56.5, on higher employment and stronger orders. Preliminary data for April showed a solid rise in services output, although acute labor and supply shortages and higher costs curbed the pace of growth. Headline producer prices in March soared by a record annual rate of 11.2% (9.2% at the core level), well above estimates and underscoring persistent inflation pressures that threatened to stifle consumers. The National Federation of Independent Business Small Business Optimism Index slid to 93.2 — the lowest level since April 2020 — as surging costs induced the worst outlook for business conditions on record.

Ten of the 11 sectors in the S&P 500 Index (-8.7%) posted negative results. Communication services was the worst performer (-15.6%), with the entertainment (-25.9%) and interactive media & services (-15.4%) groups detracting most. Consumer discretionary (-13.0%) also underperformed, weighed down by the internet & direct marketing retail (-23.4%) and automobiles (-18.6%) industries. Information technology (-11.2%) fell, led lower by semiconductors & semiconductor equipment (-18.4%) and software (-10.9%). Consumer staples (+2.6%) was the top-performing sector, driven by household products (+5.4%) and beverages (+3.8%).

Europe
European equities (-0.6%) fell as markets grew more uncertain about the region’s economic outlook amid concerns about tighter monetary policy, pandemic-related supply-chain disruptions, soaring inflation, and scarce energy supplies. Economic data released in April highlighted a relatively healthy European economy facing headwinds from a cost-of-living crisis due to high inflation. In the first quarter, eurozone GDP grew only 0.2% on a quarterly basis, primarily due to pandemic impacts and the squeeze on household incomes from soaring energy prices. Headline inflation stabilized at a record annual rate of 7.5% in April, but core inflation accelerated to 3.5%. The ECB’s approach to monetary tightening continued to lag the Fed’s more aggressive measures, with ECB President Christine Lagarde pointing to weaker demand and greater exposure to the war in Ukraine as key factors underlying the bank’s more gradual approach. European energy security was sharply scrutinized. Russia cut gas supplies to Poland and Bulgaria, while the EU announced a ban on coal imports from Russia and formulated plans to ban Russian oil imports. European energy prices rose 38% annually in April, down from a massive 44% increase in March.

The expansion in Europe’s manufacturing sector lost momentum in April; the eurozone manufacturing Purchasing Managers’ Index (PMI) dropped to a 15-month low of 55.5, from 56.5 in March, amid subdued new orders and sustained supply-chain problems. Rapidly rising prices and an uncertain economic outlook also hindered demand. In contrast, business activity in the services sector increased at the fastest rate since August 2021, as preliminary data for April indicated that consumer demand preferences shifted from goods to services thanks to looser COVID restrictions.

In the UK (+1.0%), a string of disappointing economic data releases cast a pall over the country’s economic outlook. Inflation rose to a 30-year high of 7.0% in March, further squeezing consumers and putting more pressure on the Bank of England to raise interest rates again. Private sector growth slowed sharply in April amid weakness in the services sector, while consumer confidence sank to its lowest level since 2008, fueling fears of a renewed economic downturn this quarter. Germany (-3.1%) narrowly avoided recession in the first quarter, as higher energy prices from the war in Ukraine stifled the country’s large manufacturing sector and export-oriented economy. The government downgraded its economic growth forecast to 2.2% for 2022 and warned of a recession if Russian gas supplies were shut off. First-quarter GDP results indicated that France’s (-1.2%) economy stagnated and Spain’s (+2.9%) economy slowed more than expected, both due to lower household consumption. Italy (-1.7%) fared even worse, as GDP shrank 0.2% from the prior quarter. In France, President Emmanuel Macron defeated far-right leader Marine Le Pen to win a second five-year term in office. His reelection bodes well for further European integration, although deep political divisions could pose an obstacle to his ambitious reform agenda.

Pacific Basin
Pacific Basin equities (-2.5%) fell in April, with Singapore (-5.9%) the largest decliner. Inflationary pressures intensified, as the headline CPI accelerated at a faster-than-expected annual rate of 5.4% (2.9% at the core level) in March — its highest level in a decade. Singapore’s central bank responded by tightening monetary policy for the third time since October. First-quarter GDP expanded at a slower-than-expected 3.4% annual pace, down from 6.1% the previous quarter. The Ministry of Health announced plans to remove most COVID restrictions, buoying expectations that the trade-reliant city-state can be a model for regional economies in treating COVID as endemic.

Japan (-2.7%) ended lower, with the yen sliding to a 20-year low against the US dollar. Undeterred by the currency’s weakness, mounting inflation, and stagnating real incomes, the Bank of Japan (BOJ) maintained its expansionary monetary policy, with interest rates at just 0.25%, in sharp contrast to the tighter policies pursued by most other global central banks. Government officials voiced concerns about the declining yen’s impact on consumers and businesses who are unable to pass on higher costs. Prime Minister Fumio Kishida announced a ¥6.2 trillion (US$48.2 billion) stimulus package aimed at cushioning the effects of rising fuel and raw material costs, which includes cash handouts to low-income households. Industrial production grew at a slower and weaker-than-expected 0.3% monthly pace in March, as increases in output of chip-making and textile equipment were offset by softer activity at car plants amid a powerful earthquake that brought factories to a halt. The labor market was the strongest in two years, with the unemployment rate edging down to 2.6% in March, while retail sales expanded 2% from the prior month as restrictions eased.

In Australia (-0.5%), the CPI surged by a higher-than-expected 5.1% annual rate in the first quarter, the fastest growth in two decades, driven by rising petrol, homebuilding, and food costs. The result fueled speculation that the Reserve Bank of Australia (RBA) will raise the official cash rate from a record low of 0.1% at its May meeting. This would mark the first increase in interest rates since 2010 and could be a political liability for Prime Minister Scott Morrison ahead of the tightly contested general election on May 21, in which the rising cost of living is a key issue for voters. Economists had expected the RBA to avoid becoming embroiled in a political debate by keeping the cash rate unchanged until after the election, but the CPI reading may force the central bank to take action sooner than expected, pushing interest rates to center stage as a campaign topic. The unemployment rate held steady at nearly a 14-year low in March, while monthly retail sales rose 1.8% in February, up from 1.6%, as COVID restrictions waned.

Emerging Markets
Emerging markets (EM) equities (-3.5%) declined as markets grew increasingly anxious about global economic conditions against a backdrop of elevated geopolitical tensions, worsening supply-chain disruptions, and surging food and energy prices. Tighter global monetary policy also weighed on investor sentiment. Europe, the Middle East, and Africa (EMEA) was the top performer, followed by Asia and Latin America.

EMEA (-0.3%) ended modestly lower. Turkey (+7.6%) generated strong returns after Saudi Arabia announced that it would reverse an unofficial trade embargo on Turkish goods following a productive meeting between Crown Prince Mohammed bin Salman and President Recep Tayyip Erdoğan. Other countries in Central and Eastern Europe were hampered by the spillover effects of the Russia/Ukraine war, with the Czech Republic (-1.7%) and Hungary (-4.7%) declining amid double-digit inflation and concerns about energy security. Poland (-13.8%) contended with surging inflation and the prospect of severe energy shortages after Russia halted gas exports to the country in response to its refusal to pay for supplies in rubles. South African equities (-5.5%) fell, as a strong US dollar curtailed precious metals prices.

Asian equities (-3.3%) finished the month in negative territory, with broad risk-off sentiment pressuring India (-0.8%), Thailand (-1.8%), South Korea (-2.9%), and China (-3.2%). China’s GDP rose by a better-than-expected 4.8% year over year in the first quarter, although it did not capture the extent of the economic impacts of the country’s worst COVID outbreak since the onset of the pandemic. Widespread lockdowns in more than half of the country’s largest cities significantly impaired economic activity and exacerbated disruptions to global supply chains. A steeper contraction in manufacturing in April, combined with an even larger decline in the services sector, heightened fears of a sharp slowdown in the economy. China’s government responded by pledging to increase policy support and expedite the implementation of existing policies. The Philippines (-7.2%) suffered from rising inflation and political uncertainty ahead of the presidential elections, while Taiwan (-7.2%) fell sharply as semiconductors sold off due to supply-chain concerns.

Latin American equities (-9.6%) slid following strong gains in the prior four months. Chile (-4.4%) declined amid soaring inflation and a polarized political climate surrounding the process of drafting of a new constitution. Chile’s lower house rejected two proposals for a new round of pension fund withdrawals, weakening the popularity of the country’s new president, Gabriel Boric. Political uncertainty also weighed on Colombia (-5.0%) and Brazil (-10.1%) ahead of presidential elections this year. Mexico’s (-9.0%) deteriorating economic and fiscal outlook amid rising inflation and higher fuel costs posed downside risks to its sovereign debt rating. Peru (-17.3%) plummeted, with President Pedro Castillo declaring a 30-day state of emergency following violent protests that erupted in the country’s capital over rising fertilizer and fuel prices.

Fixed income

Most fixed income sectors underperformed as credit spreads widened and sovereign yields rose amid persistent inflation, policy tightening by major central banks, geopolitical conflict, and renewed lockdowns in China.

US GDP growth was hampered in the first quarter by a drop in net exports, while consumer and business spending improved. Consumer sentiment remained elevated, supported by a resilient economic outlook despite rising prices. Consumers contended with higher inflation as the headline CPI hit its fastest annual growth rate in 40 years. Consumer credit soared on a sharp increase in credit card debt, while nonrevolving auto and school loans also increased. The labor market continued to tighten, with weekly jobless claims trending lower. The manufacturing PMI expanded to a seven-month high as consumers absorbed higher costs, while the services PMI dipped amid weak demand. Computer and electronic products drove growth in durable goods orders, while factory orders fell on weakness in the transportation equipment and machinery sectors. The housing market weakened as existing-home sales faced headwinds from rising mortgage rates and inflation, although sales fell less than expected. Housing starts and building permits rose at the fastest pace since 2006 as builders rushed to meet demand. Eurozone GDP rose a tepid 0.2% in the first quarter as rising costs, exacerbated by the war in Ukraine, hurt manufacturing activity and household spending. Germany’s business sentiment improved slightly as pessimism eased after the initial shock of the war in Ukraine and the ensuing energy crisis. The UK’s manufacturing PMI expanded, while the services PMI dipped to a three-month low as higher prices cooled demand. China’s GDP expanded more than expected in the first quarter, despite waning consumer demand amid renewed COVID outbreaks and persistent manufacturing bottlenecks. Japan’s industrial production rose as the pandemic eased, although an earthquake in the northeast disrupted auto production. Canada’s unemployment rate dropped to a record low. Australia’s CPI grew at the fastest pace in two decades, driven by higher prices for food, homebuilding, and petrol.

Fed Chair Jerome Powell stated that a 50-bps rate hike would be plausible in May. The Bank of Canada hiked rates by 50 bps and raised its neutral rate. The Reserve Bank of New Zealand hiked rates by 50 bps and signaled more “policy flexibility ahead.” Hawkish comments from several ECB members suggested a July rate hike is possible. Sweden’s Riksbank hiked rates by 25 bps and signaled further tightening in the months ahead. The BOJ defended its yield curve control policy (YCC), pledging unlimited purchases of government bonds.

Most global sovereign yields rose amid expectations for further monetary policy tightening by major central banks. In the US, high inflation and hawkish rhetoric from the Fed contributed to a sharp increase in yields. German bund, UK gilt, and peripheral European yields also ended the month higher. The BOJ’s dovish stance contrasted with the more restrictive monetary policies of other major central banks. Chinese government bond yields declined marginally after the People’s Bank of China lowered the foreign exchange reserve requirement ratio. EM yields outside of China increased, particularly in central and eastern Europe. Signs of financial stress were visible in some frontier markets, including Sri Lanka. The Bloomberg TIPS index generated a total return of -2.04%, and the 10-year breakeven inflation rate increased by 11 bps, to 2.94%, during the month.

Global credit bonds underperformed duration-equivalent government bonds as spreads widened. Within the securitized sectors, agency mortgage-backed securities, commercial mortgage-backed securities, and asset-backed securities underperformed duration-equivalent government bonds. Within emerging markets, local markets debt (-6.03%) underperformed external debt (-5.95%), in US-dollar terms. Spread widening detracted from results within external debt, while an increase in US Treasury yields also had a negative impact. EM currency depreciation drove negative performance in local markets, while EM rates movement also detracted from results.

Currencies

The US dollar gained versus most major currencies, driven by hawkish Fed rhetoric and heightened concerns about global economic growth. China’s worsening COVID outbreak and greater fears of a recession in Europe after Russia cut off gas supplies to Poland and Bulgaria contributed to a rally in perceived safe-haven currencies. Commodity-linked currencies across developed and emerging markets were the main underperformers, notably the South African rand, Norwegian krone, and New Zealand dollar. The BOJ reiterated its commitment to defend its YCC policy, accelerating the yen’s decline. The Chinese yuan fell as rising US yields and expectations for aggressive Fed tightening contrasted with the dovish policy of the People’s Bank of China.

Commodities

Commodities (+5.1%) rose, with two of the four commodity sectors generating positive returns. Energy (+9.0%) surged as the conflict between Russia and Ukraine continued to pressure global oil and gas supplies. US natural gas (+26.9%) strengthened toward the end of the month, capping April with a record gain, as production losses due to cold weather in the northern US exacerbated supply concerns. Within the oil market, supplies of petroleum distillates were extremely tight, sending the prices of heating oil (+24.7%) and gas oil (+20.0%) higher. Gasoline (+10.0%) rose on low inventories heading into peak demand season in the northern hemisphere. Crude oil (+4.0%) ended the month in positive territory following a tumultuous trading period that saw prices whipsawed by the fallout of Russia’s war in Ukraine and a resurgence of COVID cases in China.

Agriculture & livestock (+2.8%) advanced. Corn (+9.6%) extended its recent rally as the war in Ukraine threatened to disrupt European supplies and cold weather slowed early US plantings. Cotton (+8.6%), wheat (+5.1%), and soybeans (+5.1%) declined on adverse weather conditions in the US, exacerbating supply concerns. Sugar (-1.3%) fell as better weather in Brazil boosted output. Coffee (-1.8%) and cocoa (-4.9%) slipped amid signs of weaker demand, with China’s measures to tackle the latest COVID outbreak causing fears about the country’s economy. Live cattle (-3.2%), feeder cattle (-6.8%), and lean hogs (-11.8%) ended the month lower as higher corn and wheat prices threatened to raise production costs for livestock producers that rely on the grains for feed.

Precious metals (-2.7%) declined, with gold (-2.1%) and silver (-8.4%) finishing the month in negative territory, as investors weighed a stronger US dollar against broader macroeconomic concerns.

Industrial metals (-7.6%) pulled back amid heightened anxiety about the global economic recovery due to geopolitical tensions, recurring lockdowns in China, and the potential for more aggressive Fed tightening. Nickel (-1.1%), zinc (-1.6%), copper (-5.8%), lead (-6.7%), and aluminum (-12.9%) declined for the month.

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