April was again a positive month for equity markets. Towards the end of the month, investors became more cautious pending new price catalysts. The bond market experienced a drop in the US 10-year bond yield.
Equity market trends: new records
April was once again positive for the equity markets. Both the American and European stock exchanges set new records. Stock prices rose primarily in the first half of the month, after that the momentum was somewhat muted. Prices were supported by the same factors as before (reopening optimism, fiscal and monetary support), but investors perceived that much of the good news was already priced in and preferred to wait for new catalysts that could push prices higher. US equity prices continued their upward trend on the back of signs that the most impacted sectors of the economy were also recovering. Prices also found support in the good start to the publication of corporate earnings for the first quarter. Additionally, there is hope that the proposed investment packages will spur further economic recovery. However, these investment packages come with a downside: higher taxes for companies and high earning individuals to finance them. New records were also set in Europe, even though the region is still struggling with the current wave of coronavirus infections. The acceleration of the vaccination campaign is fueling hopes that the reopening of the economy will not be delayed again. The Chinese equity market (CSI300) and the broader emerging markets have fluctuated within a horizontal band since the beginning of March, following the correction they underwent in February. The Japanese equities have not been participating in the race for records in the US and Europe either.
Growth stocks outperformed value stocks in April. This performance gap was especially pronounced in the first half of the month, in line with the decline in (US) bond yields. In terms of sectors, financials and basic materials performed well, while energy was disappointing.
Bond market trends: US interest rates dip
In April, there was significant movement in US 10-year bond yields, which fell briefly to 1.53% in the first half of the month from a level of 1.75% at the beginning of April. However, recent economic figures have been strong, and the US government is issuing new bonds at a rapid pace to finance the budget deficit. However, demand for government bonds was particularly strong. However, market expectations for Fed rate hikes have declined somewhat in recent weeks (pushed further into the future) and implied inflation expectations have stabilized in the US. In this context, the decline in interest rates should perhaps be attributed to the hedging of short positions. German 10-year yields did not follow the declining US trend, instead of moving up a few basis points.
Corporate bond spreads narrowed in April. Both investment-grade and high-yield spreads are now just below their pre-Covid levels.
Central banks: confirmation of positions
The Fed took a more positive tone on the economic outlook following the FOMC meeting in late April, acknowledging that inflation has risen, ‘largely’ reflecting transitory factors. But the US central bank did not indicate that it is considering slowing the pace of asset purchases, much less than it is considering raising interest rates.
Nor were any surprises in store at the meeting of the European Central Bank. ECB President Lagarde gave no clues about future policy steps. She reaffirmed that monetary and fiscal support should be maintained well into the economic recovery. She describes the eurozone as an economy on two crutches that cannot be taken away.
Currencies: stronger euro
The US dollar weakened against most currencies in April, erasing the gains made in March. Against the euro, the dollar broke through the 1.2 level again. The change in interest rates in the US versus the eurozone and the somewhat lowered interest rate expectations in the US also weighed on the dollar. The acceleration of the vaccination campaign in Europe and the anticipation of an economic recovery help to explain the development of the exchange rate.
The emerging market currencies performed relatively well against a weakening dollar. The exception was the Turkish lira, which continued to fall to an all-time low after its plunge in March.
The Indian rupee, by contrast, was hit by the out-of-control Covid situation.
The consolidation of industrial metals in March was short-lived and prices resumed their rise in April. The price of copper rose significantly by over 10% last month and is approaching the historically high price of USD 10,000/ton. Likely, a speculative component is also responsible for the boom. But global demand for copper is booming, as metal plays a critical role in sustainable energy such as electric vehicle batteries and the storage and transport of renewable energy. Each electric vehicle contains over 80 kg of copper, as opposed to about 20 kg for a conventional car.
After some weakness in March, the Brent oil price rose in April. At the beginning of the month, OPEC+ announced its intention to increase production by 350,000 barrels per day from May onwards. Production restrictions will also be further reduced in June and July. Despite a weaker-than-expected first quarter for oil demand, both OPEC and the International Energy Agency still (slightly) raised their forecast for demand in 2021. Nevertheless, Saudi Arabia remains cautious. India and Japan are the third and fourth-largest crude oil importers in the world, respectively, and are experiencing a surge in Covid infections. The negotiations between the US and Iran on restarting the nuclear deal, which could lead to the lifting of sanctions against Iran, are also being watched. The weaker dollar also underpinned the price of oil.
The price of gold recovered slightly in the past month, finding support in lower US interest rates and the weaker dollar.
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