Global Asset Allocation Team Market Update – April 2023
Financial markets ended a tumultuous quarter on an upbeat note amid growing speculation that policymakers may have to abandon their tightening plans in response to turmoil in the banking sector. Moreover, the prompt and forceful actions taken by the authorities to limit the damage calmed investor concerns of more widespread contagion across the banking sector and added to investor optimism. Both equity and bond markets generated positive results in March, capping a quarter of solid gains for both asset classes.
Global equity markets propelled higher as investors braced for a dovish pivot from central banks. The MSCI All Country World advanced 3.7%. The S&P 500 led the global charge and posted a 3.5% gain. The longer duration technology and communications services giants saw some notable strength on the back of the sharp decline in treasury yields. By contrast, the S&P/TSX declined -0.6%, owing to underperformance in the heavyweight financials and energy sectors. Elsewhere, the MSCI EAFE rose 1.9%, while the MSCI gauge of emerging market stocks jumped 2.7%.
Fixed income markets also thrived as the banking debacle drove a reassessment of the ability of central banks to push ahead with rate hikes. Since early March, the market has gone from pricing-in 90 basis points of rate hikes through 2023 to 73 basis points of rate cuts, marking a significant shift from the hawkish trajectory that prevailed ahead of Silicon Valley Bank’s collapse. In response, bond yields spiralled lower across the curve. The US 10 year treasury yield fell by 45 basis points to 3.47%, while the 2 year treasury yield fell by 79 basis points to 4.03%. The Barclays US Aggregate Bond Index rose 2.5% in March. Similarly, the Government of Canada 10 year bond yield fell by 43 basis points to 2.90%, while the 2 year yield fell by 47 basis points to 3.74%. The FTSE Canada Bond Universe gained 2.2% last month.
The US dollar retreated as financial instability risks sparked a profound repricing in expectations for the fed funds rate. The euro strengthened following data that showed core inflation accelerating to a new record high, while some relatively hawkish-leaning rhetoric from the ECB also buttressed the euro. The Canadian dollar also edged higher alongside a broadly weaker greenback, albeit to a lesser magnitude given the sharp decline in crude prices last month.
Oil capped its fifth consecutive monthly decline in March. However, prices reversed course and shot higher in early April after OPEC+ surprised the market with a pledge to cut production by over 1 million barrels per day, adding to an already restrained supply backdrop. Gold posted its biggest monthly gain since July 2020 as turmoil in the banking sector sent unnerved investors flocking to the safety of bullion, while diminishing expectations for further fed fund rate hikes and the corresponding decline in treasury yields also sent gold prices soaring in March.