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Market Commentary April 2018

April shows an improvement on the first quarter

by
Jon Cunliffe

in Fiduciary news

08.05.2018

After a disappointing first quarter, equity markets closed in positive territory in April.  The MSCI AC World index was 0.8% higher on the month (2.7% higher in sterling terms).  The best performing equity markets were in Europe, led by Greece’s Athex on positive news on debt relief between Greece and its creditors, the Italian MIB on signs that there may be a more market-friendly coalition and the FTSE 100 on sterling weakness (positive for overseas earnings) as some investors covered back longstanding underweight positions in UK equities. 

Elsewhere, and despite another strong corporate earnings season, US equities eked out marginal gains (though obviously better in Sterling terms) with their relative underperformance driven by a rally in the trade-weighted dollar and some moderation in longer-term corporate guidance.  Finally, on the negative front, the Russian MICEX index fell 6.6% in sterling terms, reflecting a sharp selloff in the rouble as a result of US sanctions. 

Fixed income had a generally poor month, with global investment-grade bond yields ending the month 11bps higher.  However, short-dated UK Gilts fared a bit better on weak UK growth data and, as a consequence, the market has pushed back expectations of the point at which the Bank of England next hikes rates from May’s MPC to next February.  Short-dated Gilt yields declined by 6bps, whilst longer-term yields rose by 10bps, as the trend in global bond markets held sway. 

Commodity markets garnered a lot of attention.  Not only did oil rally to 3–and-a-half year highs on a more favourable supply/demand balance and some increase in geopolitical tensions, but the broad CRB commodity index reached its highest level since 2015. 

In general, this move up in commodity markets should be consistent with the global reflation theme which, up until recently, had been a significant tailwind for risk assets. 

The reason why equities have not reached new highs for the year is a function of the tail risks of a potential trade war, the sluggishness of first-quarter economic data (which still weighs on investor sentiment despite signs of improvement in the second quarter) and much more pessimism about the sustainability of the current phase of global economic expansion.

As far as the last point is concerned, we continue to feel that the low level of inflation in the developed world does not suggest the type of overheating one would expect to see at the tail end of an economic cycle, which would presage a poor environment for risk assets.  Real rates are still in negative territory and, whilst the Fed is tightening policy gradually (and the Bank of England would ideally like to be able to raise rates), the dovishness of the European Central Bank, the Bank of Japan and latterly the People’s Bank of China, is likely to ensure that on a global basis financial conditions remain supportive. 

To conclude, although we expect markets to remain somewhat skittish, we continue to expect equities to rise in the months ahead.

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