A combination of slowing economic data and inflation took their toll on markets once again this week. On Monday, data released by China showed export growth had fallen to its lowest level in two years last month, whilst the latest US consumer price index remained stubbornly high, coming in at 8.3%, above forecasts of 8.1%. Whilst growth in the UK was up 0.8% for the first quarter, the data revealed a contraction in the economy for the months of February and March as the inflationary environment took its toll. Against this background, markets continued to reprice towards an environment of higher inflation, slowing growth and rising rates.
As of 12pm on Friday, London time, US equities fell 4.7% over the week whilst the US technology sector dropped 6.4%. European stocks, despite their proximity to the Ukraine Russia conflict, rose 0.1%. The UK stock market lost a relatively modest 0.6% with the large cap index suffering most of the pain in a broad-based selloff, triggered by fears of recession from central bank tightening. Japanese equities fell 2.7% and the Australian market dropped 1.8%, whilst the emerging markets lost 4.2% with the Asia Pacific region accounting for most of the pain.
Year-on-year Chinese export growth came in at 3.9% for the year to April, sharply down from 14.7% for the year to March. This data came hot the heels of a weakening picture in the US and European manufacturing sectors. Key commodity prices weakened in response with copper falling 3.3%, currently trading at $9,103, iron ore down 7.9% and Brent crude falling 2.7%, trading at $109.3 a barrel.
Government bond yields (which move inversely to price) fell, reflecting the risk that central bank action to combat inflation leads economies into recession. The yield on 10-year US Treasuries fell as low as 2.82% on Thursday, now trading at 2.90%, having touched a new high in this economic cycle at 3.20% on Monday. Similarly German bund yields traded down to 0.89% and UK gilts to 1.71% by Friday.
Gold on the other hand failed to provide any defence as it fell 3.5% to trade at $1,817 an ounce, suffering from a US Federal Reserve which seems intent on dragging inflation back down through rate increases.
It has been a torrid start to the year, as inflationary pressures have led to a decisive pivot from central banks as they look to tighten monetary policy in an attempt to get the inflation genie back into the bottle. The picture has been compounded by the Ukrainian war and China’s ongoing zero Covid policy. This has led most major markets to be in negative territory year to date, with some recording losses over one year, including the US market with the technology sector particularly badly affected.
These falls reflect a rebalancing in market pricing with the most expensive stocks being hit commensurately harder, whilst some of the cheaper stocks in the market have made gains. Without wanting to call a bottom to this weakness, we are reminded by research from Man Group, that year-on-year falls are relatively rare, particularly over the past decade. Further to this, history suggests where markets have fallen over a year, the returns over the following twelve months are positive, with a tendency for those markets with a greater exposure to riskier stocks performing better. Small-cap indices have often outperformed large-cap and technology-heavy markets have often posted some of the strongest returns. This holds true even if the research goes back to the 1960s to understand the effects of unorthodox monetary policy which may have artificially boosted returns in recent years.
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