Not much changed coming into May as elevated volatility appears to be the new norm and investors remain hesitant toward risk assets.
The ongoing war in Ukraine, China’s Covid lockdowns, and increased monetary tightening by global central banks remain the biggest drags on sentiment. With no clear ending in sight, investors can expect elevated volatility ahead. As such the MSCI All Country World Index, which lost 8.1% in April, has lost a further 4.5% in May thus far. Both developed and emerging markets have been dragged down with the MSCI World Index losing 4.2%, followed by -6.4% for the MSCI Emerging Markets Index.
In an effort to tame inflation, the US Federal Reserve raised interest rates by 50-basis-points at their May meeting, making it the largest single hike since 2000. Although Fed Chair Jerome Powell stated that a 75-basis-point hike is unlikely; a tight labour market and persistent inflation continue to reinforce market belief that the Federal Reserve will hike rates aggressively. The annual CPI growth was 8.3% in April, lower than the 8.5% in March but higher than analyst estimates of 8.1%. The data also showed higher than expected core inflation which excludes the effects of volatile items such as food and energy. After picking through all the inflation numbers there is increased concern that inflation is going to remain sticky to the upside.
US stock markets continue to crash as the tightening financial conditions begin to drain liquidity and drag down most asset classes. Consequently, the S&P 500 and Dow Jones Industrial Average both had their worst April performance since 1970 after losing 8.8% and 4.9% respectively. The tech-heavy Nasdaq was no exception and lost a staggering 13.3%. The major indexes have continued to fall in May with the S&P 500, Nasdaq, and Dow Jones all falling a further 3.2%, 4.8%, and 2.5% respectively.
Shanghai, the economic hub of China, continues to tighten its stringent lockdown measures as President Xi Jinping pledges to double down on the country’s zero-Covid policy. The lockdown continues to hurt the bottom lines of both local and international companies as it disrupts supply chains and saps demand. This coupled with the ongoing global pressures has caused the Hang Seng index to fall 6.0% month-to-date.
In the UK, the Bank of England (BOE) warned that there is a high probability that the UK will face a “sharp economic slowdown” this year as rising rates and higher prices dent consumer demand. The BOE raised rates for the fourth consecutive time at their May meeting in an attempt to fight inflation which is being exacerbated by the Ukraine war driving up fuel and energy prices. The FTSE 100 index, which remained relatively flat in April has followed its global peers lower and has lost 3.2% month-to-date.
Commodities, which have had a tremendous start to 2022, have hit a slight bump in the road with the Bloomberg Commodity Index falling 2.8% month-to-date. Dragging the index down is oil prices which have fallen 3.9% in May due to lockdowns in China, the world’s largest oil importer, cementing worries about demand.
Locally, the rand weakened considerably as the dollar continues to gain strength. Concerns over slowing growth, rising interest rates, and the Ukraine war are causing elevated levels of volatility which have increased demand for safe havens like the dollar. Consequently, the rand lost 8.3% against the greenback in April and a further 2.2% in May thus far. The rand has also lost 1.9% against the euro but gained 0.6% against the pound as the UK continues to battle a slowing economy.
South African equities have also come under pressure with the FTSE/JSE All Share Index losing 4.1% in April and a further 5.6% month-to-date. All sectors are down with the worst performer being resources with -7.5%, followed by financials and industrials with -5.1% and -4.6% respectively. SA listed property also continues to lose ground and has fallen 4.1% in May thus far.