The market rally in March proved to be short lived, with selling across asset classes resuming in April, although at a more moderated pace than that seen in January and February. Once again, there was notable weakness in fixed income. Bond yields have continued to rise as inflation surges and investors increasingly price in interest rate rises, now widely flagged by central banks. Indeed, short term rate rises are now being so aggressively priced in that US 5-year treasuries have been consistently yielding in line or higher than its longer dated counterparts, suggesting that investors do not believe growth and inflation, and resultingly, higher interest rates will persist over the long term. Rising yields continue to have repercussions across asset classes, as investors base their return expectations off government bonds. Longer duration assets, such as high growth equities remain under pressure, as investors focus on returns today, favouring higher yielding, lower valued stocks.
The Russian invasion of Ukraine continues to be a cloud over risk assets, although the clearest expression of the conflict remains in commodity markets, particularly energy. Although energy prices have not appreciated further, they remain very volatile. Towards the end of the month, Brent Crude oil prices have traded at below $100/barrel, significantly lower than the $130/barrel peak seen in March. Energy markets continue to be conflicted by supply side concerns from the conflict and potential for demand disruption from the COVID lockdowns seen in China, as well as broader recession worries. Over the coming quarters, there are growing risks of food supply issues, as both Ukraine and Russia are significant exporters of many staples. Higher prices appear inevitable and may cause social unrest, particularly within the Middle East, which is most dependent on these supplies.
Covid in most regions is now a much-diminished market risk. However, new outbreaks in China, and the resulting lockdowns, are a significant risk to the Chinese growth as well as the global economy. Lockdowns will suppress domestic demand as well as further disrupt already disordered supply chains. This has the potential to add to inflationary pressures, increase the impetus to stockpile inventory and accelerate the reorganisation of global supply chains, likely adding to costs over time. Consequently, Chinese government actions over coming weeks and months may be the most significant risk to global markets.
Elsewhere, the French presidential election was held in the month. Although the vote was well covered, the re-election of Macron for a second term will not result in a meaningful change in direction within Europe. However, the uncertainty resulting from an election and the perceived risk of a Le Pen Presidency has been removed.
