April Equity Market Review

Market-Briefing

Equity markets continue to move higher on positive earnings and macro data

May 2019


THE WORLD IN FIVE BULLET POINTS

  • US Equity markets rallied to record highs in April boosted by better-than-expected economic data, robust corporate results and optimism that it and China would finally announce a trade deal. The Nasdaq and S&P 500 touched all time records while the Dow hovered just below former highs however, while European and Emerging Markets also rallied, many remained off their records, continuing a pattern of underperformance versus the US seen for the past 18 months.
  • Asian equity markets underperformed those in the Developed Markets with the largest Asia index in the MSCI suite, China, seeing its biggest weekly loss in six months on fears Beijing would scale back its economic stimulus programme. Key to the falls were the words “structural deleveraging” which were omitted from politburo statements but included in April’s statement. The inclusion led many market watchers to interpret this as Beijing potentially paring back stimulus support for the economy.
  • The world’s oil markets came sharply back into focus with crude prices seeing six-month highs. First, the US said it would end its Iranian waiver programme, then fighting in Libya increased worries over its export deliveries. Finally, Venezuela, which has seen its oil industry decimated by years of underfunding and then sanctions, erupted in fresh violence as the main opposition leader Juan Guaido claimed he had gained support of the military. By month-end, the result of the “coup” was unclear.
  • Spain re-elected its Socialist Party in a general election which would likely see the incumbent government continue, albeit with a potential for a different mix in its coalition or even as a go-it-alone minority government. The UK pressed the pause button on Brexit after the government failed to pass key legislation through parliament with the EU giving Britain until 31 October to come up with new ideas. Meanwhile, Ukraine turned its back on several decades of strongman rule to elect a former comedian as its president on a ticket that included a crack down on corruption.
  • A series of bombs ripped through three luxury hotels and three Christian churches in Sri Lanka during Easter Sunday services, killing around 250 people and injuring hundreds more. Although the ring leaders appeared to have been either killed or rounded up in later police operations, many worry that the attack could spark a downward spiral for the country that still holds fresh memories of a bitter civil war that only ended in 2009.

Fig.1. Regional Equity Indices Performance, USD % change

Macro Briefing - MB_MSCI_Regional Equity Returns_USD_MQY

Fig.2. Asia Equity Indices Performance, US$ % change

Macro Briefing - MB_MSCI_Asia Equity Returns_USD_MQY

Equity Markets

  • Global equity markets spent another month in the black with almost all of the world’s major indices showing positive returns. Among the drivers was optimism over global growth and an imminent deal between the US and China on trade, and the start of the first-quarter earnings season that showed continued growth in the corporate sector. The United States proved to be the best performing market yet again with a 4.0% return while the MSCI Emerging Markets Index returned 2.1%.
  • Among the Developed Markets, Europe returned 3.3% driven by a powerful performance by Germany which was 6.5% higher on hopes the worst of its economic soft patch was behind it, and going some way to offset its underperformance in the previous six months. The UK lagged with the MSCI UK index returning just 2.3% after its exit from the European Union was postponed until at least October. This stabilised sterling, sending some dollar earners lower, and was exacerbated by falls in energy stocks as oil came off its highs, and by mining stocks that were hit by iron ore export problems from their Australian mines.
  • The MSCI Emerging Markets index rose 2.1% with almost all EM country indices ending higher. EMEA eclipsed other regions with strong momentum from South Africa that rose after Moody’s said it would postpone its credit rating review to November and index heavyweight Naspers outperformed. Russia saw its currency strengthen leading to gains in equites there but Turkey dragged on the region again with a 3.6% fall following the central bank’s decision to abandon a tighter monetary policy if it needed to. Latin America also underperformed as the largest market there, Brazil, weighed on the slow progress of reform.
  • Asia ex Japan added another 1.9% to bring its YTD total return to 11.4% with every market ex Malaysia showing a positive return. Factor-wise, growth and quality stocks outperformed materially as IT and communication services sectors gained and this led Taiwan to outperform. Singapore also outperformed, driven higher by its banking sector. But the Korean markets continued to struggle with broader economic data continuing to show weakness, weighing on the won and giving the MSCI Korea index a mere 0.4% gain. China and Hong Kong both performed in line with the regional index with stocks selling off in the second half of the month on a potential de-acceleration in China’s stimulus programme.
  • Among other markets, Japan gained 1.4%, inline with Asia but below other Developed Markets and is up just 8.3% for the year, around half that for other DMs. Among MENA markets, Saudi Arabia and Qatar also showed some very strong gains with markets up 7.6% and 5.3% respectively as the second tranche of MSCI inclusion began to support stocks.

Fig 3. Bond Indices Performance in US$, % change

Macro Briefing - MB_Bond Returns_USD_MQY

Fig 4. Commodities Performance in US$, % change

Macro Briefing - MB_Commodities Performance_USD_CC

Fixed Income

  • Following the strong rally in March, global government bond markets took a breather in April. US Treasury yields picked up slightly from their one-year lows with the 10-year US Treasury yield rising by 10bps to close at 2.5%. While the March FOMC meeting minutes highlighted the US Federal Reserve’s concerns over slowing global growth, generally better-than-expected domestic data exerted some upward pressure on US yields; non-farm payroll surprised strongly on the upside with 196,000 jobs added in March, while the ISM manufacturing index rose from a reading of 54.2 in February to 55.3. But subdued core inflation reading, which saw the Core PCE index rising by 1.55% yoy in March kept a lid on yields.
  • In Asia, moderate yield rises were similarly observed in most domestic bond markets, including India despite a 25 bps rate cut by the Reserve Bank of India in April – its second successive interest rate cut this year. Negative market performance was also seen in China after the Politburo hinted at taking a more cautious tone on policy easing. This contributed to upward pressure on China onshore rates. In contrast, Malaysia and Taiwan government bonds registered a more resilient performance.
  • Asian dollar credit markets delivered modest gains. Despite the modest rise in US interest rates, stable demand for yield resulted in some tightening in credit spreads. Non-investment grade generally outperformed investment grade on the back of higher accrual income, although investment grade sovereigns fared relatively well due to more significant spread compression.

Commodities

  • Crude oil prices rose over the month to reach highs not seen since November but were off their highs by the end of the month. The decision by the US to end sanction waivers to countries dealing with Iranian oil was the principal driver leading to exports from Iran dropping to 3.1mb in the third week of April from 10.6mb the week before. Later, comments from the White House that OPEC should look to raise output to soften the impact of Iran sanctions, combined with record US output and rising stockpiles, brought prices off their highs.
  • In other oil market developments, Russian exports to Europe were suspended after the quality of oil coming down the pipeline deteriorated significantly. Fighting in Libya was another cause of the upward pressure on crude prices while another sharp drop in production from Venezuela also provided support. Finally, Saudi Arabian oil giant Saudi Aramco comfortably raised US$12bn in its first ever bond issue, after receiving more than US$100bn in orders.
  • Gold prices were little changed through the month but did hit year lows at one point as equities surged. Copper touched multimonth lows before climbing higher in the final week with worries on the strength of the global economy weighing initially. Aluminium and zinc prices hit six- and 13-month highs respectively on hopes the US and China would come to a trade deal. Iron ore was volatile although finished higher after first Australian miners BHP and Rio Tinto said a cyclone in western Australia would hit exports then Brazilian rival Vale said it would resume production at its biggest mine which was forced to close in February.

Currencies

  • US dollar strength maintained its momentum against most G10 currencies. The Swedish koruna and Swiss franc saw the biggest declines against the dollar, both down more than 2%. The koruna suffered declines after the Riksbank lowered its wage forecasts and made it clear that there was limited scope for tightening. The euro also continued to decline against the dollar. The UK pound was flat largely because Brexit headlines abated while the Japanese yen only lost half a percent despite talk that the Bank of Japan would lean in a more dovish direction at its April meeting (the meeting was a non event when it did take place).
  • Emerging market currencies found little reprieve in April. The Turkish lira sold off more than 6.5% after the local elections at the end of March left Erdogan’s party with less control over key cities. Concerns were that after the elections, policymakers would allow the currency to depreciate but the key upset for Turkey was that the central bank removed its pledge to tighten rates if needed, suggesting it may cut sooner rather than later; as inflation remains stubbornly high at 19.7%.
  • In Asia, the Korean won declined more than 2.5% against the dollar. Economic data out of Korea continues to disappoint as both inflation and GDP data came in much lower than expected. The pressure is now on the Bank of Korea to cut rates and the market is now pricing in a 75% chance of a cut over the next 12 months. The Korean government did introduce a supplementary fiscal budget but the fear is that it will not be enough to support the economy.
  • Elsewhere in emerging markets, Argentina’s currency continues to struggle and is now at an all time low against the dollar. Presidential election-related concerns are increasing as Cristina Kirchner, the former president, is drawing level in the polls against incumbent President Macri who is seen as a reformer. Given the weakness in the currency, Argentina asked and got approval from the IMF to increase the amount it can intervene in the currency markets. Mexico’s peso and Russia’s ruble were strong, gaining 2.5% and 1.5% respectively against the dollar with the recent rise in oil prices supportive.

Fig 5. Currencies Performance versus US$, % change

Macro Briefing - MB_Currencies Performance_USD_MQY

Fig 6. Central Banks Interest Rate, % change

Macro Briefing - MB_Central Bank IR_CC

Economics

  • Fears the government shutdown, economic uncertainty, and a major trade dispute would negatively impact US economic growth proved wide of the mark as the economy grew by a consensus beating 3.2% in the first quarter. However, economists pointed to slowing consumer spending and an underlying growth that depended on a high inventory build – that could well reverse – as dangerous straws in the wind that need to be watched carefully. One cause of the inventory build could have been the Boeing 737 MAX aircraft being built but not delivered in first quarter, according to some analysts.
  • In contrast, annual eurozone GDP was notably lower than the US with the region growing by just 0.4% in the first quarter but April manufacturing confidence only just rose, and service sector confidence fell, implying there could be further weakness in the actual numbers further down the line. The UK continued to show signs of economic robustness in the face of uncertainty surrounding Brexit. Japan’s central bank kept rates on hold at -0.1% and reaffirmed its easy stance on monetary policy would last until the spring of 2020 at the earliest, signaling interest rates would unlikely rise before then. 
  • China’s economic growth in Q1 was higher than most had expected at 6.4%. This was flat qoq with the bulls pointing to fiscal policy support, recovery in the export sector despite the ongoing trade dispute, and a pick up in credit growth attributed to a loosening in banking lending requirements. Industrial production also surprised on the upside exports rebounded to a 8.3% growth in March and retail sales in March were also higher than expected at 8.7%. Finally, April PMI data came in below expectations at 50.1 vs 50.5 with economists seemingly split on whether this signaled a pause or something much deeper.
  • Korea saw its economy shrink by 0.3% in the first quarter to offset some gains in the fourth quarter of 2018 and probably reflected an unusually high government expenditure programme late last year. Year on year GDP shrank 2%, its highest level since 2009. India economic data was weak: manufacturing PMI, industrial production figures and auto sales all fell, leading to concerns about broad economic growth. Australia saw inflation figures miss substantially in April, coming in at 0% qoq dragging yoy levels to 1.3%, well below the RBA target of 2-3%.

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