The Russia-Ukraine war continues to stunt global growth, with declines in equities and bonds across most major markets, rises in bond yields and a more aggressive stance on monetary tightening.
The Russia-Ukraine war persists, and with it the impact on energy and input prices and supply chains, and increasing disruption to economic growth. Although the release of strategic oil reserves and global growth concerns have seen oil prices moderate, gas prices in Europe shot up when Gazprom, a Russian majority state-owned energy company, cut gas supplies to Poland and Bulgaria. Although more acute on a regional basis, the conflict has crept into incoming activity data and set the tone for revised growth estimates. The International Monetary Fund released its updated World Economic Outlook, forecasting global growth of 3,6% for 2022, a downgrade from the previous forecast of 4,4%. The World Bank also revised expectations lower for global growth for 2022 to 3,2%, from 4,1%.
The US economy contracted over the first quarter by an annualised 1,4%, surprising to the downside. Largely a result of an increase in imports, alongside a decrease in exports and a drawdown of inventory, the data also showed an economy benefiting from consumer spending and fixed investment. China recorded economic growth of 4,8% yoy in the first quarter of 2022. While this was better than expected, the widespread restrictions imposed since March is likely to reflect in weaker second quarter data. Despite some respite from monetary and fiscal policy, incoming data from the country has shown weakness, raising doubts whether the country will be able to meet the 5,5% growth target for 2022.
Between the ongoing war, lockdown restrictions in China and an increasingly hawkish US Federal Reserve, global risk assets had a dismal start to the second quarter. Equities and bonds across most major markets declined, in contrast to the US dollar, which climbed to new highs, with the DXY appreciating by 4,7% over the month. The S&P 500 lost 8,7% in April, despite a broadly credible earnings season in the US thus far. The rout was even worse for interest-rate-sensitive growth stocks, with the technology-heavy Nasdaq 100 declining by 13,3%. Of course, it would be remiss not to point out the impact of the Tesla share price slide following the announcement of its takeover of Twitter. European indices and emerging markets also lost ground, with the MSCI Emerging Markets Index declining 5,5%. The MSCI World Index declined by 8,3% in April, bringing returns over the year to date to -12,9% and tipping the 12-month returns into negative territory.
Global bond markets traded under pressure, as bond yields rose to reflect more hawkish sentiment. The US 10-year bond yield approached the 3,0% mark, ending the month just shy at 2,9%. In US dollar terms, the Bloomberg Global Aggregate Bond Index declined by 5,5% in April, bringing the year-to-date returns to 11,3%.
April saw several central banks across the globe communicate an even more aggressive stance on monetary tightening. The US Federal Reserve minutes confirmed proposals to shrink the balance sheet by about $95bn per month, almost double the amount in the previous cycle between 2017-2019. Markets now expect a 50 bps interest rate hike in May, with some Fed governors even introducing the notion of a front-loaded 75 bps. Even so, inflation expectations continue to rise despite all the hawkish commentary. Matters remain complex in Europe, where borrowing costs have surged in anticipation of the end of the European Central Bank’s (ECB’s) asset purchase programme. The German 10-year bond yield topped 1,0% in early May for the first time since 2015. More indebted countries, like Italy, have seen more pressure. Incoming inflation data has further stoked expectations of earlier interest rate hikes. The Eurozone preliminary inflation figure for April printed a new high of 7,5%, while German inflation increased to a 40-year high of 7,8%. This puts the ECB under even more pressure, especially against a vulnerable growth backdrop.
Front-loaded action or evidence of peak inflation (or peak in hawkish expectations) may provide central banks with greater credibility and sooth bond markets. Unfortunately, the former may also carry the risk of stoking or realising recessionary fears.
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