Global Asset Allocation Team Market Update – May 2023
The second quarter got off to a solid start, with both stock and bond markets generating positive results in April. Investors welcomed the strong start to the corporate earnings season, where better-than-expected results have helped to overshadow concerns stemming from persistent inflation, the prospect for further rate hikes, and lingering fears of an economic downturn.
Global equity markets extended their 2023 gains in April, with the MSCI All Country World advancing 1.3%. Regionally, performance was mixed. Developed Markets (+1.6%) outperformed their Emerging Markets peers (-1.3%) by a wide margin, with the latter dragged lower by notable underperformance in Chinese stocks (-5.2%). Elsewhere, European stocks (+3.6%) led the global charge last month, while the S&P 500 rose 1.5%. The S&P/TSX (+2.7%) also generated solid results, thanks to outperformance in the heavyweight energy sector.
Meanwhile, both the Barclays US Aggregate Bond Index (+0.6%) and the FTSE Canada Bond Universe (+1.0%) generated positive results last month. Bond yields slid lower as some reports of softening US economic conditions prompted investors to reassess how tight the Federal Reserve can keep policy in the face of increased recession risks. Moreover, ongoing struggles at some US regional banks also fueled speculation for rate cuts in the back half of 2023. Traders now expect the fed funds rate will be around 4.5% by December.
In currency markets, the US dollar edged modestly lower. Performance was mixed versus its major trading partners last month. The pound (+1.9%) and euro (+1.7%) both appreciated against the greenback, while the Canadian dollar (-0.3%) and the yen (-2.5%) weakened. On the latter, the Japanese yen sunk to its lowest level in seven weeks after the Bank of Japan left its ultra-loose policy settings unchanged and said it would patiently continue with monetary easing, underscoring its divergence with other major central banks that remain steadfast in the fight against inflation.
In commodity markets, oil swung wildly in April, initially surging to a 15-month high after OPEC and its allies announced a surprise output cut at the beginning of the month. However, much of those gains were wiped out on the back of a deteriorating outlook for global growth and accordingly, energy demand. Copper posted its biggest monthly drop since last June, with mounting pessimism towards the industrial metal underscoring the extent to which the global demand outlook has deteriorated over the last month – and specifically in the Chinese factory space. Gold eked out a modest gain and hovered just below the US$2000/oz mark. Investors wagered that the Federal Reserve could soon reach the peak in their tightening cycle, which sent both treasury yields and the US dollar lower and buttressed the appeal of the non-interest bearing metal.
Q2 2023 Investment Outlook & Portfolio Strategy