Commentary
Monthly market commentary: Global developed equity markets declined in April
Stocks fall on diminishing prospects for Fed rate cuts
Global developed equity markets declined in April 2024, as persistent inflation in the U.S., as well as seemingly hawkish comments from Federal Reserve (Fed) Chair Jerome Powell, exacerbated investors’ concerns that the Fed and other major central banks will delay interest-rate cuts. Monetary policy hawks have a negative view of inflation and its economic impact, and thus tend to favour higher interest rates. In contrast, emerging markets posted modest gains, benefiting from relatively strong economic growth. The Pacific ex. Japan region recorded a relatively smaller loss and was the strongest performer among developed markets in April, as Hong Kong and Singapore garnered positive returns. North America was the primary developed-market laggard due mainly to a downturn in the U.S. Europe was the top performer within emerging markets for the month, led by strength in Poland and Hungary. Conversely, Latin America was the most notable underperformer due to relative weakness in Colombia and Brazil.
Global fixed-income assets, as measured by the Bloomberg Global Aggregate Bond Index, were down 2.5% in April. High-yield bonds recorded the smallest declines for the month and led the U.S. fixed-income market, outperforming U.S. Treasury securities, corporate bonds, and mortgage-backed securities (MBS). Treasury yields rose for all maturities during the month, with the exception of 1- and 3-month bills. Yields on 2-, 3-, 5- and 10-year Treasury notes increased 0.45%, 0.47%, 0.51%, and 0.49%, respectively, in April. The spread between 10- and 2-year notes narrowed from –0.39% to –0.35% over the month, and the yield curve remained inverted.
Global commodity prices, as measured by the Bloomberg Commodity Total Return Index, rose 2.7% in April. The West Texas Intermediate (WTI) and Brent crude oil prices dipped 1.5% and 0.8%, respectively. Early-month gains amid expectations that ongoing geopolitical tensions in the Middle East would disrupt oil exports subsequently were offset by cautious optimism regarding U.S.-led negotiations for a ceasefire in the Israel-Hamas conflict. The New York Mercantile Exchange (NYMEX) natural gas price climbed 12.9% over the month amid concerns that the tensions in the Middle East could curb shipments from Qatar. The gold spot price rose 2.9% in April as the Israel-Hamas conflict prompted investors to seek “safe-haven” investments. Wheat prices rose 7.7% for the month on speculation that weather in Russia, Europe and the U.S. could lead to supply constraints.
As widely anticipated, the Federal Open Market Committee (FOMC) left the federal-funds rate unchanged in a range of 5.25% to 5.50% following its meeting on April 30-May 1, and suggested that interest-rate cuts are not imminent. In a statement announcing the rate decision, the FOMC noted, “Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.” Additionally, the Fed announced that, beginning in June, it will reduce the pace of the runoff in its Treasury holdings from $60 billion to $25 billion, while maintaining the $35 billion cap on the reduction of MBS. A rapid runoff of the Fed’s holdings can lead to higher interest rates as the market absorbs the increased supply of debt as the central bank does not purchase new securities. Slowing the runoff would decrease the debt supply in the market, easing the pressure on interest rates.
At a news conference following the FOMC meeting, Fed Chair Jerome Powell commented that, despite stubborn inflation, the central bank does not see the need for a rate hike. Powell said, “I think it's unlikely that the next policy rate move will be a hike.” But the Fed Chair also said that the central bank is “prepared to maintain the current target range for the federal funds rate for as long as appropriate.” Furthermore, Powell quashed talk of stagflation, an environment of stagnant activity, accelerating inflation, and rising unemployment. “I don’t really understand where that’s coming from,” he stated, noting that the economy continues to grow and the annual inflation rate is under 3%. “I don’t see the ‘stag’ or the ‘flation’.”
On the geopolitical front, Iran deployed missiles and drones in an attack on Israel on April 13. The Israelis were able to repel the attack with the aid of a coalition that included the U.S., the U.K., France, Saudi Arabia, and Jordan. In the early morning (local time) of April 19, Israel retaliated with a narrowly focused drone attack on several military facilities in the city of Isfahan in central Iran. There appeared to be limited damage and no reports of fatalities in either skirmish. The Biden administration urged both countries not to escalate the hostilities.
In a related matter, after several months of contentious debate, the U.S. House of Representatives passed legislation to provide nearly $95 billion in aid to Ukraine ($60.1 billion), Israel ($26.4 billion), and Taiwan and the Indo-Pacific region ($8.2 billion). The Senate approved the aid package in a 79-18 vote on April 23, and President Joe Biden signed the legislation the following day. Republican Party leaders in the U.S. House of Representatives previously had rejected the aid packages that were approved with bipartisan support in the Senate.
(unless otherwise noted, data sourced to Bloomberg)
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