Global Asset Allocation Team Market Update – May 2022
Volatility lingered-on in April and sent financial markets into a tailspin. Macroeconomic risks intensified and sentiment deteriorated amid China’s efforts to suppress COVID-19, the ongoing war in Ukraine, persistently elevated inflation, and an aggressive monetary tightening cycle – which when taken together have dampened the outlook for growth and weighed on both stocks and bonds.
Global equity markets saw their worst monthly performance since the onset of the pandemic in March 2020, with the MSCI All Country World dropping 8.1% in April. Growth stocks trailed their value counterparts as the sharp rise in interest rates hurt the frothy growth sectors that have future profits at risk. Consequently, the U.S. benchmarks led the monthly decline, with the S&P 500 falling 8.8% and the NASDAQ tumbling 13.5%. The S&P/TSX fell 5.2%, with positive results in the heavyweight energy sector leading to outperformance versus its global peers. Looking abroad, international developed stocks were down 6.8%, while emerging markets (-5.7%) outperformed developed markets after China equities pared earlier losses following the Communist Party Politburo’s vow to prop up the flagging economy.
Fixed income markets extended their 2022 rout as major central banks deepened their hawkish tilt in response to runaway inflation. The 10 year treasury yield rose by 60 basis points to 2.93%, while the 2 year treasury yield rose by 38 basis points to 2.71% as accelerating cost pressures and a hot labor market boosted the case for a rapid rise in the fed funds rate – with Chair Powell citing the importance of “front-loading” the removal of policy accommodation. Similarly in Canada, the 2 year government bond yield rose by 33 basis points to 2.62%, while the 10 year yield rose by 46 basis points to 2.87%. After the Bank of Canada raised interest rates by 50 basis points in mid-April, Governor Macklem voiced the potential for another 50 basis point move in June and reiterated the need to act “forcefully” to wrestle down inflation. The FTSE Canada Bond Universe was down -3.5% in April, while the Barclays US Aggregate lost -3.8%.
The US dollar extended its run of unrelenting strength and rallied to a five-year high, with wagers for an aggressive fed funds tightening trajectory boosting the yield appeal of the greenback versus its developed market peers. The dollar got an extra boost after the Bank of Japan doubled-down on its bond buying operations to keep a lid on yields, underscoring the policy divergence between a dovish Bank of Japan and a hawkish Fed.
Finally, crude oil prices fluctuated as investors weighed the impact of China’s lockdowns and the fallout from the Ukraine war on global energy demand and supply. Still, oil managed to post a fifth monthly gain, its longest winning streak since January 2018. By contrast, gold retreated as the sharp back-up in bond yields and a stronger US dollar both weighed on the yellow metal.