Global Asset Allocation Team Market Update – April 2022
Sentiment remained fragile in March as the Russia-Ukraine war continued to reverberate through financial markets, with investors contemplating its impacts on the global economy, inflation, and central bank policy. While fixed income markets extended their selloff, global equity markets managed to recover from the lows following Russia’s invasion of Ukraine, though questions remain about the durability and sustainability of the equity market rally given the combination of surging inflation, the prospect for an aggressive path to monetary policy normalization, and ongoing geopolitical tensions.
Global equity markets regained some ground in March, with the MSCI All Country World rising 1.9%. Although the S&P 500 capped its worst quarterly decline since 2020, the index staged a healthy rebound last month as investors stepped-in to buy the dip. Meanwhile, the S&P/TSX posted its biggest monthly gain since October, with the boom in commodity prices sparking outperformance in the heavyweight resources space. Looking abroad, euro area stocks performed poorly on the back of economic risks facing the region due to the war in Ukraine. Finally, emerging markets were trampled, with Chinese equities seeing some notable weakness amid concerns about the economic impacts of COVID-19 lockdowns at a time of already softening domestic demand.
Fixed income markets once again generated negative results amid heightened inflation pressures globally. Global bond yields shifted higher in response to the hawkish pivot at central banks, with policymakers prioritizing price stability even in the wake of lingering geopolitical angst. As expected, the Federal Reserve raised rates by 25 basis points in March. However, officials delivered a hawkish surprise and confirmed that policy will be tightened aggressively to rein-in persistently elevated inflation. Yield curves flattened, with shorter-term yields rising by more than their longer-dated peers as traders ramped-up their wagers for faster rate hikes. The two-year treasury yield rose by a massive 90 basis points to 2.33%, while the ten-year treasury yield rose by 51 basis points to 2.34%. Similar moves were seen in Canada after the Bank of Canada lifted-off in March and a senior official called for policymakers to “act forcefully” to quell decades-high inflation. The FTSE Canada Bond Universe was down -3.0% in March, while the Barclays US Aggregate lost -2.8%.
The US dollar strengthened as increasingly hawkish undertones among Federal Reserve officials boosted the yield appeal of the greenback. The Canadian dollar managed to rise even in the wake of a broadly stronger US dollar, with bullish moves in commodity markets buttressing the commodity-oriented currency.
Crude oil markets swung wildly as traders assessed the highly uncertain geopolitical landscape and the implications for energy supplies at a time when market conditions are already very tight. Still, crude ended the month higher, but pared some of those gains at month-end after President Biden ordered an unprecedented release of crude from the Strategic Petroleum Reserve in an effort to tame rampant prices. Finally, gold advanced as investors weighed the fallout from Ukraine war, while concerns over accelerating inflation also saw traders bid-up bullion prices.