Knowledge Centre Archive


April 2012 Market Update

By SEI Investment Management Unit


  • Investor confidence deteriorated due to concerns about the eurozone.
  • Global bonds outperformed all other asset classes as risk appetite waned.
  • Global equities struggled, with cyclical and riskier stocks lagging the most.

Investor confidence deteriorated in April due to eurozone concerns and problems in Spain. Risk appetite waned and the financial markets witnessed a flight to safety, whereby investors shunned assets perceived to be risky in favour of more defensive investments. Consequently, global bonds outperformed global equities and government debt was favoured over all other asset classes.

Economic Backdrop

Investors once again focused on the eurozone in April, this time with Spain in the spotlight. The Spanish economy was confirmed to be in recession, unemployment levels remained among the highest in the European Union and the country was saddled with a poor growth outlook. The Spanish government had previously revealed its intention to push through austerity measures in an effort to reduce the country’s spending by €27 billion. There were public demonstrations (which turned violent) against these harsh financial reforms at the end of March, and more were planned for early May. Investors subsequently became increasingly worried that Spain may follow in the footsteps of other struggling eurozone nations and be forced to request a financial bailout. As a result of growing concerns about the country’s finances, credit rating agency Standard & Poor’s (S&P), downgraded Spanish sovereign debt toward the end of April. This downgrade also impacted S&P’s view of the country’s banks, many of which may need to rely on government support in the future. On the final day of the month, S&P took negative actions against 16 Spanish banks, downgrading 11 of them. This included Banco Santander, one of the largest banks in the eurozone.

For the eurozone as a whole, economic data released during April painted a gloomy picture. Unemployment levels for the region reached a record high of 10.80% in February, retail sales fell by 0.10% (when compared with January sales) and manufacturing output continued to decline. The Markit Eurozone Manufacturing Purchasing Managers’ Index (PMI) fell from 49.00 in February to 47.70 in March (any number below 50.00 indicates contraction). However, inflation remained stable at 2.70% in March (and was estimated to have fallen to 2.60% by the end of the April). The result of slowing growth was the feeling that eurozone austerity measures have been prioritized over economic expansion. This sentiment was reflected in national politics during April, including in the lead up to the French and Greek elections and through the collapse of the Dutch government in the wake of failed budget cut talks (although a budget deal for 2013 to help reduce the deficit by 3.00% was finalized by the end of the month).

Canadian economic indicators were lukewarm in April. Statistics Canada reported that real gross domestic product in Canada unexpectedly dropped 0.2% in February, driven mainly by a slowdown in the mining and manufacturing sectors. The Royal Bank of Canada’s manufacturing purchasing managers’ index (PMI) rose to 53.3 in April from 52.4 in March, on continued improvement in the manufacturing sector. This was the strongest level of the year. A reading above 50 indicates expansion. The broader Ivey PMI decreased in April to a seasonally adjusted 52.7 from 63.5 in March. This level still implies growth, but came in well below analysts’ predicted reading of 61.0. Statistics Canada revealed that Canadian employment grew by 59,200 in April, rising nearly six times faster than forecasted. Private-sector and full-time positions led the gain. Unemployment hit 7.3% for the month, up from 7.2% in March.

In the U.S., the economy showed modest signs of life after the first estimate of gross domestic product came in at 2.2%. This was below the consensus number of 2.5% and the fourth quarter read of 3.0%. The Federal Open Market Committee met and held interest rates steady. Federal Reserve Chairman Ben Bernanke provided a modest upgrade to the economic picture while continuing to voice concerns about slow growth within the labour market and the housing sector. Investors eagerly anticipated the release of April’s nonfarm payroll data, hoping that would halt a developing slowdown within the labour market. Unfortunately, it did not move the needle in either direction, and indicated only modest growth. Retail sales were stronger than expected, and showed that consumers are finding ways to cope with higher gas prices. However, housing and manufacturing data were weaker.

News was mixed for the U.K. in April. Estimated first-quarter gross domestic product readings from the Office for National Statistics showed that growth in the U.K. contracted by 2.00%, signalling that the U.K. economy returned to recession. Further bad news showed that the recent trend of falling inflation had halted, as the U.K. Consumer Price Index rose to 3.50% in March. However, some positives remained; for example, first-quarter unemployment levels fell marginally to 8.30% and March retail sales increased by 3.30% (when compared with March 2011). Growth in the U.K. manufacturing sector was also solid, which was reflected in the Markit/Chartered Institute of Purchasing & Supply UK Manufacturing PMI reaching its highest levels in ten months, rising to 52.10 in March from 51.50 in February (any number above 50.00 signifies expansion).

Market Impact

The flight to safety witnessed during the month resulted in increased demand for government bonds, which are perceived to be safer investments compared with other fixed-income instruments. Government bond yields (which move inversely to prices) generally fell in April, although Spain was a notable exception. Spanish government bond yields continued to rise due to worries over the state of the country’s economy and the S&P downgrades. With regard to other peripheral eurozone counties, the government debt of Portugal held up well during the month, reflecting the belief that financial austerity is possibly more credible for smaller, more centralized governments (like Portugal) than for larger, decentralized nations (such as Spain). Within the fixed-income markets, emerging markets debt bucked the risk-off trend and demand continued to be high in April. The asset class managed to distance itself from generally downbeat global news and benefited from pockets of optimism, such as the announcement that the Chinese government intends to increase the amount that foreigners can invest in their economy and S&P’s upgrade of Uruguayan government debt.

Global equity markets struggled in April. Riskier, more cyclical sectors experienced the largest declines, while higher quality, more defensive names performed better. Telecommunications, Consumer Staples and Health Care were the only sectors within global equities to record positive returns (in U.S. dollar terms), and Financials brought up the rear. Spanish and Italian equities bore the brunt of negative sentiment and experienced large declines. Despite the announcement that the country had slipped back into recession, U.K. equity performance remained fairly robust in April (despite ending the month in negative territory in local currency terms).

Index Data

  • The S&P/TSX Composite Index declined by CDN 0.60%.
  • The DEX Universe Bond Index returned CDN 0.13%.
  • The Dow Jones Industrial Average index gained USD 0.16%.
  • The S&P 500 Index declined USD 0.63%.
  • The NASDAQ Composite Index returned USD -1.42%.
  • The MSCI AC World Index, used to gauge global equity performance, fell by USD 1.14%.
  • The Barclays Global Aggregate Index, which represents global bond markets, rose by USD 1.18%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” moved from 15.50 to 17.15, but reached as high as 20.39 on April 10.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from USD $103.02 per barrel at the end of March to USD $104.87 by April 30.
  • The euro weakened against most major currencies and the Japanese yen strengthened. The U.S. dollar ended April at $1.62 against sterling, $1.32 versus the euro and at 79.85 yen.


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