Our Investments team summarises what’s been driving international and local market activity over the previous month.

April 2022: Fed-induced market jitters

Global equity markets were under severe downward pressure in April with high inflation, the prospect of aggressive monetary policy tightening and rising recession risk undermining risk appetite. The anticipation of a prolonged war in Ukraine, combined with the EU’s plan to ban Russian oil in the short term, which is expected to be followed by a ban on gas, will have repercussions for energy prices and the inflation outlook.

Amid all of this, China is dealing with a Covid outbreak. As policymakers still adhere to their zero-Covid policy, Covid-related lockdowns are putting a lot of strain on already stretched supply chains. The 5.5% GDP growth target recently announced by Chinese authorities already appears under threat. The manufacturing and service sector PMI readings plunged in April, while retail sales growth in March slumped to -3.5%. The authorities are now looking to implement a range of policy stimulus measures to support Covid-impacted households and businesses, as well as an acceleration of the infrastructure spending program. In addition, the IMF downgraded its global growth projections to 3.6% in 2022 and 2023. This is 0.8% and 0.2% lower for 2022 and 2023 than projected in January. Downgrades are due to the humanitarian crisis and economic damage expected from the Ukraine war, which further delays the economic recovery from covid. Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest.

The MSCI World index declined 8.3%. Foreign currency provided some diversification, with the AUD cutting the loss in global equities to approximately 3% in AUD terms, as the AUD declined more than 5% for the month. Likewise, the MSCI Emerging Markets index declined 5.6% in USD terms in April. Global bond yields continued to surge in April as markets priced in a potentially more aggressive Fed against the background of 40-year high inflation rates. The US 10-year treasury yield rose to 2.93%, up from 2.32% a month earlier and 1.52% at the start of the year. Some Fed members had expressed the possibility of 75 basis point moves, front-loading policy tightening to quickly slow growth in order to avoid inflation expectations becoming unanchored and feeding into higher wage claims. The market implies that the Fed funds rate will reach 3.25% mid-2023 before moving lower.

Locally, the Australian equity market outperformed global markets in April, losing just 0.8%. Year to date, Australian equities have outperformed global hedged markets by more than 13%, buoyed by strong commodity prices and a strong bank sector, as well as their lower exposure to rising bond yields and their inflation-hedging characteristics. Annual CPI headline in Australia surpassed expectations by rising 5.1%. The core inflation measure showed a 3.7% annual increase, well above the RBA’s target range. More than two-thirds of its components1 have risen by more than 2.5%, with the largest increases recorded in housing, transport, education and food. The jump in inflation prompted markets to factor in an imminent lift in RBA’s official cash rate in early May.

1 Inflation.

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