April 2022 Global Market Commentary
Global markets tumbled in April with developed market equities (as represented by the MSCI World Islamic Index) on the decline by 5.6% month-on-month while emerging markets equity (as represented by the MSCI EM Islamic Index) shed 5.7% month-on-month.
Investor sentiment seemed heavily affected by the prospect of even tighter monetary policy by the Federal Reserve and other major central banks. The continued lockdowns in China and the war in Ukraine also reined in investors’ appetites for riskier assets.
In the US, the Federal Reserve Chairman Jerome Powell signaled that the central bank remains committed to taming inflation, leading to investors having to deal with a 50 basis point interest rate hike in May and June. This also led to the US dollar rising to its highest level in two decades. US inflation accelerated to 8.5% in March – hitting a four-decade high – driven by skyrocketing energy and food costs.
There were lackluster earnings results by tech heavyweights such as Amazon, Netflix and Paypal that overshadowed what is a mostly positive corporate earnings season, where 81% of S&P 500 companies reported positive earnings surprises for Q1 2022. In general, companies warned that the supply chain bottlenecks from China lockdowns are posing a risk for their outlook this year, while high commodity prices also have meaningful implications to cost pressures.
In Europe, the European Central Bank is facing slowing growth and surging inflation due to the war in Ukraine and sanctions on Russia that are putting an upward pressure on oil and natural gas prices. Meanwhile, Emmanuel Macron defeated his far-right rival Marine Le Pen to be re-elected as President of France which had a modest impact on the market, as the result was largely expected.
In China, authorities are having a hard time containing the Covid-19 outbreak. The two biggest cities, Beijing and Shanghai, spent the month in lockdown, dealing a massive blow to economic activity. Unemployment hit a 21-month high in March as many businesses have been forced to suspend operations. The Chinese yuan plunged to the lowest level since November 2020. While monetary and fiscal policy may provide some relief, China’s 5.5% growth target for 2022 is now in jeopardy as policymakers prioritize the zero-Covid strategy over economic growth.
Current market sentiment is fragile, and as a result, volatility could stay elevated in the near term. The Federal Reserve meeting in May is expected to be the primary focus for the market’s direction in the near term. Meanwhile, corporate guidance has so far provided some confidence that S&P 500 earnings can grow between 5%-10% in 2022, partly offsetting the pressure on equity valuations ahead.