STELLAR• 6 May, 2024

Financial Markets Overview - April, 2024

April proved challenging for both equity and fixed income markets. Strong US inflation data, coupled with a seemingly weak but resilient private demand indicated by the first quarter US GDP, stirred concerns among investors that central banks might delay monetary policy easing. Consequently, both stock and bond markets experienced declines, with global bonds dropping 2.5% and developed market equities falling 3.7%. However, emerging market equities managed to eke out a modest 0.5% gain, buoyed by increased investor interest in undervalued Chinese stocks and exposure to commodities.

The impact of changing interest rate expectations was notably felt in interest rate-sensitive sectors like small caps and REITS. Small caps saw a significant decline of 5.1%, while REITS fell by 6.3%, trailing behind the overall large-cap market performance.

Fixed income markets also bore the brunt of shifting rate expectations. In April alone, markets priced out one and a half expected rate cuts in the US for the year, pushing back the timing of the first cut. This led to a rise in 2-year Treasury yields by 40 basis points to 5.0%, and 10-year Treasury yields by 47 basis points to 4.7%.

The resilience of the economic environment and concerns over escalating tensions in the Middle East drove commodity prices higher, with the Bloomberg Commodities Index rising 2.7% and emerging as the top-performing major asset class for the month. Rising energy prices and reduced interest rate sensitivity also favored the value segment of the equity market, which outperformed the growth segment relatively.

Despite the challenging environment, European equities outperformed their US counterparts, with positive economic indicators like the eurozone's flash composite PMI rising to 51.4 in April. The MSCI Europe ex-UK Index fell by only 1.5%, while UK equities, supported by energy and commodity companies, delivered positive total returns of 2.5% and emerged as the top-performing equity market for the month.

The S&P 500 experienced a 4.1% decline as rising bond yields pressured valuations. While the economic backdrop remained supportive of corporate earnings, companies that missed estimates faced harsher market reactions, reflecting investor scrutiny amid concerns over stretched valuations.

Japanese equities retraced some gains made over the past months due to widening interest rate differentials and concerns about imported inflation weakening domestic demand.

Inflation in the Eurozone and the UK remained subdued, fostering confidence in potential rate cuts by the ECB and the BoE. Euro sovereigns outperformed US Treasuries and UK Gilts, driven by stable spreads and a constructive growth outlook, with euro high yield being the only major sector to avoid negative returns. The relatively high-growth periphery in the Eurozone also fared better than core Europe, contributing to the region's overall outperformance.