By Jan Faure
Global markets mostly declined in April as higher than expected US inflation data fuelled concerns that major central banks would hold interest rates at high levels for an extended period. In the US, the S&P 500 fell 4.2% while the tech-heavy Nasdaq Composite shed 4.4% as rising bond yields and mixed corporate results added pressure on US valuations.
Conversely, European equities demonstrated resilience, outperforming their US counterparts. Improved growth and more favourable inflation dynamics helped partially shield European equities from increased geopolitical risks and higher for longer interest rates. The Eurozone’s GDP expanded by 0.3% in the first quarter, well above market expectations of 0.1% expansion. While the UK’s FTSE 100 gained 2.4% in April, the Euro Stoxx 50 declined 3.2%.
In Asia, Japan’s Nikkei fell 4.9%, while Hong Kong’s Hang Seng rallied 7.4%. Chinese equity markets gained in April, buoyed by an improving macro-economic outlook and Beijing’s gradual implementation of policy measures aimed at addressing a property crisis and stimulating domestic demand. It seems foreign investors are starting to take note, following a tumultuous post-Covid period.
European inflation slowed further in March, potentially increasing the prospect of an interest-rate cut by the European Central Bank (ECB) in June. Headline inflation (CPI) in the Euro-area increased 2.4% YoY in March, down from 2.6% in February, aligning with market expectations. The data suggests that inflation in Europe is on track to return to the 2% target. ECB President Christine Lagarde has signalled a first rate cut in June, most likely ahead of any policy changes by the US Federal Reserve.
In the US, both headline and core inflation were worse (higher) than expected. The Fed’s preferred measure, Core PCE, remained at 2.8% YoY in March, above expectations for a decline to 2.6%. This reinforced the Fed's stance on the need for further evidence of inflation nearing the 2% target and diminished expectations of a June rate cut. The market is now pricing in two rate cuts (at most) in 2024, down from 6 to 7 rate cuts that were expected at the start of the year.
Consequently, fixed income markets faced pressure as interest rate expectations shifted. The yield on the 10-year US Treasury surged almost 50 basis point in April to a six-month high. Globally, investment grade bonds declined 2.5% in April as rate expectations were revised.
April highlighted the persistent risk of inflation. At the same time, US first-quarter GDP data came in weaker than expected – the US economy expanded at an annualised rate of 1.6% in Q1, below forecasts for 2.5%. This slowdown in growth underscores the potential impact tight monetary policy may be having on growth, necessitating careful consideration by the Fed. While the US economic backdrop remains supportive, recent data suggests a potential increase in volatility across bond and equity markets.
Table 1: Global Indicators – Local reporting currencies
