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Market Update Monday 24th April 2023

Fear gauge hits lowest level since late 2021

The major benchmarks ended mixed following a week in which first-quarter earnings reports seemed to grab the spotlight from a relatively light economic calendar and the CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, fell to its lowest level since late 2021.

Corporate Earnings dominate market focus

88 of the S&P 500 companies have reported first quarter earnings so far and whilst showing a decline year on year of around 7%, many have surpassed analyst estimates. The consensus is forecasting an increase in earnings of 10% or so over the coming year. But if a recession were to unfold, further declines look certain to be seen and this remains one of the clear downside risks still hanging over equities.

The chance of a recession depends in part on how quickly inflation pressures ease and whether we are close to the peak in interest rates. Headline inflation has now fallen back substantially in the US to 5.0% from a high of 9.1% and in the Eurozone to 6.9% from 10.6%.

Unfortunately, the same cannot be said for the UK where annual UK consumer price growth in March slowed by less than expected to 10.1% from 10.4% in February, driven by surging food and drink prices, posting a gain of close to 20%, the largest rise for 30 years. Separate data from the Office for National Statistics indicated that wage growth showed few signs of moderating in the three months through February. Food prices were a major culprit, posting a gain of close to 20%, the largest rise for 30 years.

Global Equities flat for the week

Global equities were flat for the week with the S&P 500 -0.1% and the Nasdaq -0.4% in the US. Europe and the UK fared best with gains of around 0.5%, while emerging markets were dragged down by a 2% decline in China. Despite the release of GDP data confirming a strong rebound in the first quarter as the economy reopened, Chinese equities suffered from worries that the US might further increase restrictions on its tech sector. Robust export growth and infrastructure investment, and a rebound in retail spending and property prices, drove the recovery. The data prompted several banks to raise their annual growth forecasts for China as consumption continues to recover.

Government Bond Yields Rise

The yield on the benchmark 10-year U.S. Treasury note jumped following positive data released in the form of private sector employment and PMI data both surprising to the upside. European government bond yields edged higher as investors weighed the prospect of another interest rate hike from the European Central Bank (ECB) in May. The minutes of the March meeting of the ECB showed policymakers were split over the decision to raise benchmark interest rates by half a percentage point. A “very large majority” voted in favor of the decision, as “inflation remained far too high and was projected to remain high for too long.” Yields on 10-year German government debt climbed toward 2.5%, while yields on French sovereign bonds of the same maturity also ticked higher. In the UK, yields also rose on benchmark 10-year debt on strong inflation and wages data.

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