Global Asset Allocation Team Market Update – March 2023
After a roaring start to the year, a wave of risk aversion swept up the financial markets in February. Hopes for an imminent end to rate hikes and a dovish policy pivot were dashed in the wake of unrelenting signs of resilient growth, an overheated labour market, sticky inflation, and some hawkish central bank rhetoric that prompted a shift in investor expectations towards higher interest rates for longer and quashed the optimism that spurred the powerful market rally at the beginning of 2023. Volatility resurfaced in response and most major asset classes lost some notable ground over the last month, underscoring the case for private markets strategies in a well-diversified portfolio.
The global equity market rally fizzled out in February. The MSCI All Country World slipped 3.0%, paring strong year-to-date gains. Regionally speaking, the selloff was widespread across the globe. Both the S&P 500 and S&P/TSX fell 2.6%. Elsewhere, the MSCI EAFE shed 2.2%, while the MSCI gauge of emerging market stocks declined 6.5%.
Fixed income markets also generated negative results and erased nearly all of their 2023 gains as investors reassessed the trajectory for interest rates. Indeed, reports of stronger-than-expected growth and inflation have reinforced that central banks have more work to do in order to stifle inflation. Earlier in February, traders were widely anticipating Federal Reserve rate cuts in the back half of the year but have since tempered those wagers. Since then, reports of tight labour market conditions and a reacceleration in inflation prompted traders to bet on a higher peak in the fed funds rate and a prolonged stay at that level. The policy-sensitive 2-year treasury yield topped 4.8% last month, the highest level since 2007 – while the 10-year treasury yield backed up to 3.92%. Similarly in Canada, the 2-year government bond yield rose to 4.21%, while the 10-year yield jumped to 3.33%. Consequently, the FTSE Canada Bond Universe declined 2.0% in February, while the Barclays US Aggregate Bond Index fell by 2.6%.
In currency markets, the US dollar (DXY) snapped its four-month losing streak as investors braced for a more hawkish Federal Reserve, while the simultaneous selloff in both bonds and stocks bolstered demand for the safe haven currency. The greenback advanced against most of its Group-of-10 peers in February, with the euro, pound, and yen all spiralling lower. The Canadian dollar was also undercut by a broadly stronger US dollar, while the latest retreat in oil prices also weighed on the loonie last month.
Finally, in commodity markets, oil extended its downward move as lingering concerns about tighter monetary policy and swelling US stockpiles eclipsed optimism about rising demand from China, while copper halted a three-month run of gains as risk appetite faded throughout the month. Gold posted its worst month since the middle of 2021 after a slew of data showing an overheated US economy saw traders ratchet-up their wagers for higher interest rates, which drove both treasury yields and the US dollar higher and dampened the allure of non-interest bearing bullion.