April 2018 Monthly Market Review

In the US, growth remains healthy. Extraordinarily strong earnings momentum, cor- porate tax cuts and fiscal stimulus underpin our positive view. Key early warning in- dicators for the economy continue to paint a positive picture of the growth outlook.

The European’s Central Bank President Mario Draghi, expressed confidence in the eurozone’s solid economic growth but trade tensions and the recent soft patch in economic data can be seen as major risks. The region’s composite purchasing managers’ index (PMI) held steady.

In the UK, all policy is overshadowed by Brexit negotiations. The last UK economic data were mixed in April 2018, the first-quarter GDP was very weak with a growth of just 0.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} quarter-on-quarter, but the labour market looks stable with convincing data.

The Bank of Japan (BoJ) voted 8-1 to maintain short-term interest rates at -0.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} and long-term rates near 0{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}.

The region’s economic backdrop is encouraging. Chinese growth also remained robust. Annual growth was 6.8{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in the first quarter of the year.

Volatility persisted through much of April 2018. Geopolitical events continued to influence the markets and in- vestors, especially concerning the “trade war” between the US and China and the tensions in Syria between the US and Russia. Despite some risks, the global economy continues to expand, inflation is only rising gradually, and earnings growth is healthy.

Uncertainty about these events and the role of Iran in the international community, pushed the oil prices to 7{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} over the month. As a result, commodities overperformed up to 2.2{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} YTD and 2.6{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in April 2018. Sustained and steady economic expansion is supporting strong corporate earnings growth globally, boosting preference for equities. In the US investors had to balance on the downtrend of these geopolitical events on one hand, and on the other hand a big earnings season that looks to be exceeding expectations. The stronger earnings season pushed developed market equities higher over the month of April 2018. Emerging market equities have returned 2.0{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} since the beginning of the year. During the last part of the month (April 2018), the strong earnings momentum provided some support to the market. In the technology sector, Facebook shares recouped some of their recent losses and soared over 9{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} with profits that easily beat estimates. Fellow Internet Amazon.com gained nearly 4{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} following an earnings beat. The S&P 500, led by energy and technology firms, expanded by over 23{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} on a year- over-year basis.

U.S. data confirmed a moderate pace of economic growth in the first quarter, data across the board continues to look strong. Labor costs rose faster than expected, and consumer confidence climbed to its second-highest level since 2000, while first-quarter annualized GDP growth of 2.3{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} was robust. The Federal Reserve (FED) emphasised the strength of the US economy as a justification for the rise in US rates. Three additional increases of the interest rates are expected by the end of 2018. Rising rates, increased economic uncertainty and the return of market volatility have driven the spreads on other perceived “safe” short dated asset. The US dollar remained supported after the Federal Reserve indicated that it is on track to keep gradually raising interest rates, including at its June 2018 meeting.

Inflation is growing gradually. The continuing growth will at some point lead to an acceleration in inflation, and this means, a much tighter monetary policy will be applied from the US Federal Reserve.

Source: World Bank

It now expects inflation to rise from 2.3{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} to 2.4{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} for 2018, followed by an increase to 2.6{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} next year.

There are many factors to consider:

  • Higher wage growth.
  • President Donald Trump’s fiscal plans.
  • Rising oil prices.
  • Trade wars.
  • In Europe, a stronger labour market is supporting consumer confidence. The recovery in the eurozone continues to be underpinned by improvement in the labour market. The eurozone unemployment rate fell to 8.5{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} thanks to significant declines in several countries, including Italy, France and Spain. The European Central Bank (ECB) is suggesting that accommodative monetary policy is still providing a significant tailwind to growth. President Mario Draghi expressed confidence in the eurozone’s solid economic growth but trade tensions and the recent soft patch in economic data can be seen as major risks. A divergence in the outlook for inflation between the US and the eurozone suggests that monetary policy will also continue to diverge. The ECB’s current guidance remains that it will continue with its asset purchase programme until September 2018.

    The last UK economic data were mixed in April 2018. The first-quarter GDP was very weak with a growth of just 0.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} quarter-on-quarter, but the labour market looks stable, with convincing data: unemployment falling to 4.2{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}, and wage growth accelerating slightly to 2.8{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}. UK inflation fell by more than expected to 2.5{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}. Investors have slashed expectations for a rate hike from the Bank of England at its upcoming meeting in the first part of May 2018 after recent weak economic reports.