Market Update | Week 17

IBOSS Weekly Market Update | April 22, 2024

Equity markets were down again last week for the third week running. Global equities dropped just under 3% in both local currency and sterling terms and are now down around 4.5% and 3.5% respectively from their end-March high.

At a country level, Japan was the worst performer, falling 6% in sterling terms, while UK and European equities held up best with declines of 1% or so. At the sector level, technology led the decline with a fall of 6.6% and the AI chip poster-child Nvidia was down as much as 14%.

Bonds also posted losses of around 0.5% as government bond yields continued their climb. The 10-year US Treasury yield is now back up to 4.6% from a low of 3.8% at year-end, although is still some way off the 5.0% level tested last October.

Unlike bonds, which have recorded losses year-to-date as hopes for interest rate cuts have been scaled back, equities had until this month brushed off renewed talk of rates having to remain higher for longer. This was down both to the increased earnings support implied by the unexpected strength of economic activity and the burst of AI-related optimism.

This month, however, equities have suffered along with bonds. In part, this is simply because global equities were ripe for a correction, having seen no meaningful set-back during the 24% run-up in prices since the end of October.

But it is clearly also partly a response to the escalation of the conflict in the Middle East. That said, fears on this front had abated by the week-end following signs that Israel and Iran were stepping back from any further escalation. Indeed, oil prices ended the week down 5%.

The correction in equities, however, is also a result of expectations for a soft-landing, now starting to be replaced by talk of ‘no-landing’. Namely, the idea that while there is no imminent recession in prospect, inflation will prove somewhat sticky without one and not allow interest rates to fall half as far or fast as had been hoped.

Fed Chair Powell himself alluded to this last Tuesday. He said the Fed needs greater confidence that inflation is moving sustainably towards its 2% target in order to cut rates, and that it’s likely to take longer than expected to achieve that confidence. The market now does not anticipate rates being lowered before September and is no longer confident there will be even two cuts before year-end.

Here in the UK, BOE Governor Bailey has professed confidence that inflation is coming under control in line with its forecasts, even though it did not fall as much in March as had been hoped. While the headline and core rates did slow to 3.2% and 4.2% respectively, domestically generated inflation pressures remained elevated with services inflation still running at 6.0%.

Wage growth also came in higher than expected in February, with average earnings excluding bonuses up 6.0% on a year earlier. Yet at the same time, signs of a significant softening in the labour market are now emerging. Employment is falling and the unemployment rate rose to 4.2% from 3.9%. This weakening, along with the marked fall in inflation from last year’s highs, should ensure wage growth continues to moderate slowly.

Still, while headline inflation remains on track to dip temporarily below the BOE’s 2% target over the next couple of months, core inflation looks set to remain closer to 3%. Most likely, the BOE will start cutting rates over the summer, if not as soon as June when the ECB looks set to begin.

Elsewhere, Chinese growth surprised on the upside in the first quarter, with GDP rising 1.6% to be up 5.3% on a year earlier. Retail sales and industrial production growth, however, slowed more than expected in March, suggesting the economy ended the quarter on a subdued note.

Although no-landing is clearly not as good as a soft-landing and casts some doubts over the longer term outlook, prospects for equities over the rest of the year remain positive. Global economic activity is strengthening and rates still look set to fall, even if not by as much had been hoped, both of which are big positives.

While this favourable backdrop is now priced into the more expensive parts of the equity market, we believe the cheaper areas such as Asia and Emerging Markets, the UK and small and mid-cap, which have lagged to-date, have scope to catch up.

As to how much further the current correction has to run before equities resume their upward trend, this will depend in part on this coming week’s events. Microsoft, Alphabet and Meta all report mid-week and their results will be watched closely. Tesla also reports but this is of much less importance these days as it fell from grace a while back and is down 40% year-to-date.

The other key event will be the release of the Fed’s favourite inflation measure on Friday to see whether or not it backs up the somewhat gloomier inflation message shown by the March consumer price numbers.


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