April proved to be another volatile month, with most of the major stock and fixed interest markets weakening over the period on concerns about economic growth and inflationary pressures. The FTSE 100 remained a notable outperformer making modest gains, helped by its oil exposure, and by the weakness in the pound, which fell some 4.5% over the month against the US Dollar.
Be careful what you wish for
IMF cuts global economic growth forecast for 2022 due to transformative shock from Ukraine war.
Russia re-focuses efforts on Donbas region of Ukraine.
Further US and EU sanctions on Russia, while NATO and other allies provide more military support.
World Bank warns of largest commodity shock since the 1970’s.
US Fed 0.5% rate hike guidance and Quantitative Tightening (QT) to start in June - 10-year government bond yield hits 3%.
US inflation rises to 8.5%.
IMF cuts UK economic growth forecast for 2022 and 2023.
UK inflation hits a new 30-year high and is expected to breach 10% by the end of 2022.
Bank of England increases interest rates by 0.25%, to 1%, and forecasts a recession.
Sterling falls below $1.25.
European inflation touches 7.5%.
China battling Covid-19 with lockdown of Shanghai extended and cases in Beijing.
Brent oil settles back to $106 on concerns about slower Chinese economic growth.
Following a small recovery in March, the US technology sector took another sizable leg down in April, with NASDAQ falling more than 10%, resulting in a fall of nearly 25% from November highs. In addition to the deteriorating interest rate backdrop, poor results from a number of the larger companies, such as Alphabet and Netflix caused further anxiety around the earnings outlook and extreme valuations in the sector.
The direct effects of the Ukraine war on investor sentiment, appears to be diminishing. Whilst Putin remains a very unpredictable individual, the performance of the Russian military has been woeful, suggesting it unlikely that he will undertake further material action outside of the East and South of the country. As such, barring a nuclear escalation, the conflict could move from front-page news and from the media spotlight, to give other global issues more in focus.
The economic outlook has become more uncertain, as central banks harden their language and actions against inflationary pressures. Policy makers are effectively engineering an economic slowdown to bring inflation under control, but at the same time, they are treading a very fine line to avoid causing a recession. The Bank of England has already thrown in the towel on the economy and is forecasting a recession in 2022.
The zero covid strategy in China has now seen draconian shutdowns in both Shanghai and Beijing. As well as causing further disruption to the global supply chain, such actions unsurprisingly weaken the economic outlook in China and by extension for the global economy.
Nervousness around the economic outlook has caused a number of metal commodity markets to peak in April. Copper has fallen circa. 15% since the middle of April, with iron ore some 10% lower since earlier in the month. Whilst both oil and gas markets have been very volatile in 2022, UK gas prices have fallen more than 50% since the start of April, with Brent crude oil having peaked in March. This is welcome news and should ease some inflationary concerns.
Elsewhere, supply and production of food commodities remains an issue. In addition to the direct disruption to Ukrainian farms, global fertiliser production has also been severely impacted, which in combination with current weather conditions in Western Europe, means that the harvest elsewhere will be hit. As such, although some food commodity prices remain elevated, with the Governor of the Bank of England warning “apocalyptic” food prices, other commodities appear to be trending lower, a position further exacerbated by the strength of the dollar.
A combination of investors seeking to reduce their risk exposure and the aggressive action of the Federal Reserve on interest rates has seen the dollar strengthen some 8% since early February against a global basket of currencies. Sterling has not been immune to this dynamic, falling some 4.5% against the Dollar in April alone. This is very unhelpful for the inflationary backdrop in the UK, making imports more expensive, with the Bank of England now forecasting that it will exceed 10% before the end of the year.
Whilst developments in The Kremlin remain extremely difficult to predict, there are tentative signs that commodity markets have started to peak, which in turn would ease global inflationary pressures. Early May has seen some extreme movements in financial markets driven by a deterioration in the economic outlook, and fears that central banks inadvertently cause a recession. We are closely monitoring these developments, but would suspect that material weakness in financial markets would see central banks soften their approach, particularly if commodity market weakness persists.
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