Monthly Market News April 2022 – Trends in the markets

Alexandre Gauthy - Economist

In April, equity markets struggled to cope with rising interest rates while the geopolitical context remained tense.

Our expert, Alexandre Gauthy, analyzes the trends in April 2022.

Equity markets: extremely weak month for global stock markets

In the past month, stock markets had declined sharply in all regions. This evolution reinforced existing concerns: higher inflation and higher costs for households and companies, higher interest rates, the war in Ukraine and the energy supply in Europe, the slowdown in growth in China, etc. On the other hand, both in the U.S. and Europe, the publications of company results for the first quarter are considered solid.

European stock markets performed relatively better in local currency than the other regions. The U.S. stock markets, in particular, performed weakly. Both the S&P500 and the Nasdaq fell below their previous lows of mid-March. Companies considered the big winners from the pandemic over the past two years (Amazon, Netflix, etc.) are now in the losing camp. The rise in interest rates also weighed on U.S. stock market indices, including growth companies and technology stocks, more than in other regions. They are more sensitive to higher interest rates because of their valuation. Nevertheless, the stronger dollar still allowed the U.S. stock market to limit the damage to European investors. Value outperformed against growth stocks in that environment, and that trend was more pronounced in the U.S. than in Europe.

Chinese stocks fell sharply in April due to concerns about growth. The Chinese government is still applying a ‘zero covid’ strategy and had to announce new lockdowns in several cities in recent weeks. However, the central bank did announce monetary support measures, which allowed share prices to recover somewhat at the end of the month.

Equity markets	April	3 months	since 31/12	12 months
MSCI EMU NR	-2.0%	-7.7%	-11.0%	-2.3%
MSCI EUROPE NR	-0.6%	-2.8%	-5.9%	6.5%
MSCI USA NR	-4.1%	-3.0%	-7.2%	11.8%
MSCI JAPAN NR	-3.8%	-4.7%	-8.2%	-1.2%
MSCI EM. MARKETS NR	-0.4%	-4.8%	-5.3%	-6.8%
MSCI AC WORLD NR	-3.0%	-2.7%	-6.1%	7.9%
Performances in EUR dd. 30/04/2022				Source : Bloomberg

Bond markets: rise in bond yields continues

The upward trend in bond yields continues in the United States (where 10-year yields remained just below 3%) and in Europe (where German 10-year yields remained just below 1%). Analyst commentary states that the peak in inflation may be in sight but at the same time acknowledges that inflation will not return to pre-covid levels any time soon. While in the past month, the driver of nominal interest rates was mainly rising real interest rates in the U.S., it was primarily inflation expectations in the euro area. It reflects the difference in market expectations about the aggressiveness of central banks in both regions.

Interest rate spreads against Germany of other Eurozone government bonds moved up sharply due to a general risk-averse attitude among investors and anticipation of fewer bond purchases by the ECB. Italian spreads widened to nearly 200 basis points, and nominal yields approached 3%, their highest level in more than three years. The limited increase in French interest rate spreads in the run-up to the presidential election was short-lived.

After narrowing in March, corporate bond spreads widened again in April

Government Bond Yield 10 yr	Current	April	3 months	Since 31/12
Belgium	1.52	0.49	1.17	1.33
France	1.46	0.48	1.03	1.26
Germany	0.94	0.39	0.93	1.12
Italy	2.77	0.74	1.48	1.60
Greece	3.34	0.67	1.45	2.01
Spain	1.97	0.54	1.23	1.41
United States	2.93	0.60	1.16	1.42
Japan	0.23	0.01	0.05	0.16
Evolution until 30/04/2022				Source : Bloomberg

Central banks: central banks fight inflation

Several central banks raised their interest rates in April (Canada, New Zealand, Sweden, etc.) to fight against rising inflation. The Federal Reserve is expected to take another step in May (50 basis points) toward a less accommodative monetary policy. In addition, the minutes of the March meeting show that the Fed is thinking of progressively reducing its balance sheet by 95 billion dollars per month. The start date may also be announced in May. The 95 billion figure is on the high side of expectations. However, it is no surprise given the hawkish comments of many Fed members, including those considered relatively dovish.

The European central bank acknowledged that inflation risks had increased from March and confirmed its intention to end its bond purchase program, perhaps as early as July. As a result, a first interest rate hike may follow ‘some time’ later. The market currently assumes a rate hike during the third quarter.

China's central bank lowered its reserve requirement ratio by 0.25% points, making it easier for banks to extend credit. However, against expectations, it left its policy rate unchanged despite the growth slowdown.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	0.25-0.5%	+0.25%	mar. 2022
ECB deposit rate	-0.50%	-0.10%	Sept. 2019
Situation on 30/04/2022			Source : Bloomberg

Currencies: the rise of the dollar in momentum

The rise of the U.S. dollar has accelerated over the past month. The safe-haven currency also benefits from a growing interest rate advantage towards Europe, which predicts a slower pace of interest rate increases, towards Japan, where monetary policy is not expected to be tightened, and towards China, where monetary policy is likely to become more accomodative.

The Chinese renminbi experienced a remarkable April with a drop of more than 4% against the dollar. China's central bank allows the renminbi to move 2% in either direction against a trading range it sets each day. By setting the middle rate weaker, the bank is trying to offset the slowing economy. Nevertheless, the magnitude of the move was more significant than the market expected.

The weaker Chinese currency harmed the prices of other emerging market foreign currencies, including those outside the Asian region.

Currencies	Current	April	3 months	Since 31/12
USD	1.055	4.7%	6.1%	7.3%
GBP	0.839	0.4%	-0.4%	0.3%
JPY	136.95	-1.7%	-5.9%	-4.6%
CHF	1.026	-0.5%	1.5%	1.1%
Evolution versus EUR until 30/04/2022				Source : Bloomberg

Commodities: Chinese growth slowdown depresses the price of industrial metals

After a hectic March, there were fewer significant fluctuations in the Brent oil price in April. The price was balanced by the uncertainty about Russian energy supplies to Europe and OPEC's reluctance to accelerate the increase in oil production back to pre-covid levels. On the other hand, the slowdown in China's growth and the use of strategic reserves (especially by the U.S.) limit the rise in oil prices. The European gas price experienced a short-lived rebound after Russia cut off gas supplies to Poland and Bulgaria but closed lower on balance for the month.

Industrial metals had to give up March's gains and ended April lower (-7.6% for the GSCI Industrial Metals) due to the slowdown in growth and lockdowns in China.
In April, gold prices fell and could not hold above 1,900 dollars per ounce. The sharp rise in bond yields, which was mainly caused by the increase in real interest rates over the past month, weighed more heavily than the ‘safe haven’ characteristic of the precious metal.

Curious about the economic impact of the conflict in Ukraine? Discover the video of our Chief Economist, Hans Bevers, on this topic.