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Market Update April 2023

Markets steady in face of US debt ceiling concerns

  • Deadline approaching for agreement to increase current US debt ceiling to avoid US government default.

  • Figures show global growth slowing during first quarter, but recession avoided.

  • Inflation pressures remain. UK inflation falls by less than expected in March as food prices soar by 19.1%.

  • Issues in banking sector rumble on.

  • An armed conflict in Sudan between rival factions of the military government results in hundreds of deaths.

  • Incumbent President Joe Biden formally announces his re-election for 2024 presidential campaign.

  • Saudi Arabia announce surprise cut to crude oil production, causing the oil price to spike higher, before falling later in month.

  • Finland officially joins NATO, becoming the 31st member of the military alliance and expanding NATO's border with Russia by 1,300 kilometres.

Global equity markets were broadly flat during a month in which data released showed that economic growth in the US and the Eurozone slowed during the first quarter, driven by inventory reductions, and the employment market is starting to cool. Although inflation is showing some signs of declining it remains stubbornly high in many parts of the world. In the US, headline annual inflation slowed from 6% in February to 5% in March, just below the expected reading of 5.1%. Core inflation, which is preferred by the US Federal Reserve (Fed) as it removes the more volatile food and energy price inflation, rose as expected from 5.5% to 5.6%. This was then viewed alongside the minutes from the March Fed meeting that showed the central bank expected “tighter credit conditions for households and businesses after the regional bank stresses, which would weigh on economic activity, hiring and inflation”. During April, the MSCI World Equity Index registered a small gain of 0.1%, with UK and European equities outperforming. The FTSE 100 Index rose 3.4%. Smaller companies, which are often perceived as riskier and more sensitive to economic changes than their larger peers, continued to struggle during the month, with the MSCI World Small Cap Index down 1.7%.

The recent turmoil within the banking sector settled down somewhat in April, although the share prices of many regional US banks remained under pressure. Notably, the share price of First Republic Bank slipped a further 75% after it announced that it lost about $100 billion in deposits in the first quarter. The latest concern for market participants is the fact that the US is close to reaching its debt ceiling, which is the congressionally mandated limit on the borrowing of the US government. Fears that agreement on a new limit will not be reached caused the 1-year US sovereign credit default swap spread (which insures against default) to hit another record high. It also caused investors to pile into ultrashort-term Treasury bills. Longer dated US Treasury bond yields were relatively unchanged during the month.

The Bank of England and US Federal Reserve did not have a scheduled meeting to discuss their key interest rates during April, but UK data released during the month showed surprises in both inflation and wage growth. This increased the likelihood of a further rate hike in May and caused UK bond yields to rise. The UK 10-year government bond yield rose from 3.49% to 3.72%. The market continues to price in deep interest rate cuts for all major developed countries over the next 18 months.

Many US companies released first quarter earnings during the month. Overall, earnings slightly beat expectations, driven by financials, with JPMorgan Chase posting record revenue on higher interest rates. Profit margins for the S&P 500 in aggregate are also on course to tick up, after six quarters of gradual declines due to rising costs. Many stocks within the technology sector also produced unexpectedly strong earnings, helped by heavy cost cutting, with Amazon amongst the companies to deliver robust first quarter results.

China first-quarter GDP grew a faster than expected 4.5% year-on-year. Chinese consumers saved a huge proportion of their income during their various lockdowns and now have pent-up demand. This helped French luxury giant LVMH, who reported a sharp rise in sales during April, driven by strong demand from the world’s second largest economy.

Within commodity space, the price of crude oil spiked sharply higher at the start of the month following Saudi Arabia’s surprise cut to production. Prices softened later in the month on fears of slowing demand. The price of gold enjoyed another positive month, as it hit a new record high for the year and ended the month up 1.1% in USD terms.

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It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

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