A Turbulent Two Months

As at 4 May 2023

Following a turbulent March in which several large US banks failed, asset markets showed signs of stabilisation in April. This came as fears around contagion in the banking system eased, leading to a partial rebound in financial sector equities. At the end of the month, however, First Republic Corporation became the third regional bank to fail, causing renewed fears around contagion within the banking sector. For both the US and Europe, March data showed a decline in the pace of inflation on weaker energy prices, though core inflation remained persistently high. Meanwhile, China showed stronger-than-expected economic growth in Q1, powered by a sharp rebound in consumer activity, though the latest data from April pointed to a larger-than-expected deceleration in manufacturing activity. On the energy side, OPEC+ announced a surprise production cut at the beginning of the month, though this led to only a short-lived bounce in the oil price.

Chart to Show Rebound in Asset Classes

Source: Bloomberg

Given this backdrop, equities rose by +1.7% (MSCI World Local Index), global bonds rose +0.4% (Bloomberg Global Aggregate Index) and the US dollar stabilised in April. Commodities declined -0.8% (Goldman Sachs Commodity Index), though industrial metals saw a larger decline amid pessimism around the durability of China’s economic recovery.

Going forward, recent events have reminded investors of the delayed, and often unpredictable, effects of monetary tightening. Policymakers are likely to factor in any deterioration in credit provision when it comes to setting the path of short-term interest rates. Crucially, however, they will also have to weigh this against persistently strong inflation, as well as a relatively robust rate of economic growth.


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