Market Analysis Apr 2019

In April, US equities surged to new record highs, buoyed by favorable economic data that spurred risk appetite. This positive momentum persisted despite the Federal Reserve's dovish approach that had been in effect since the beginning of the year. The unemployment rate remained steady at 3.8%, with nonfarm payroll employment increasing by 196,000 in March. Q1 GDP surpassed expectations, registering an annualized rate of 3.2%, compared to Q4 2018's 2.2%.

The equity market gained significant traction from robust economic data, especially early in the month. The technology sector demonstrated strength, buoyed by strong quarterly earnings reports from Amazon.com and Twitter. However, the final trading day saw Google parent company Alphabet fall short of market expectations, disappointing investors.

Despite this, both the information technology and communications sectors concluded the month with positive gains. The financial sector rebounded from its relatively subdued performance in March. The healthcare sector faced challenges due to concerns over potential changes to drug pricing legislation.

Eurozone equities sustained their impressive performance in April, building upon the gains achieved in Q1. The MSCI EMU index returned 4.9%, with the IT, financials, consumer discretionary, and industrials sectors spearheading the advance. Semiconductors in the IT sector reported robust Q1 results, rekindling hopes of recovery after last year's weakness, while the consumer discretionary sector received impetus from gains in the automobile industry. However, the energy, utilities, and real estate sectors encountered negative returns. Encouraging economic data from China bolstered sentiment toward economically-sensitive areas of the market.

Notwithstanding concerns stemming from less optimistic surveys, such as the purchasing managers' indices, Q1 economic growth in the Eurozone demonstrated greater resilience than anticipated, expanding by 0.4% quarter-on-quarter. Although manufacturing remained in contraction territory, Germany's Ifo business climate index experienced a decline. On the political front, Spain's general elections saw the incumbent Socialist Party (PSOE) emerge as the largest party, but the question of whether they will govern independently or form a coalition remains unanswered.

Although the UK stock market observed gains in April, its performance lagged behind the global equity benchmark. Sectors such as pharmaceuticals, mining, and tobacco, which had demonstrated strength in Q1 2019, faced poor performance in this period.

The UK was granted a flexible extension to the Article 50 deadline, preventing a no-deal Brexit on April 12. Despite political uncertainties, the UK continued to exceed economic growth expectations. The latest monthly GDP report by the Office for National Statistics indicated a 0.2% expansion in February, albeit at a slower pace compared to January's 0.5% growth.

Manufacturing played a pivotal role in the UK's economic growth in 2019, with Markit's PMI surveys showcasing a resurgence in the sector. The UK manufacturing PMI reached 55.1 in March, marking its highest level in a year. However, this recovery seemed driven by stockpiling in anticipation of the original Brexit deadline on March 31.

In April, the Japanese equity market experienced a 1.7% rise, attributed to a single-day surge at the start of the month, after which the market remained within a narrow trading range. The fiscal year reporting season commenced, yet actual news was limited, and currency market volatility remained subdued. The abdication of the Japanese Emperor towards April's end and the advent of the Reiwa era contributed to a subdued market environment. Foreign investors were cautious about establishing new positions ahead of the extended Golden Week public holidays. While early earnings results exhibited a minor negative skew, price reactions remained muted. No market reaction followed the Bank of Japan's policy meeting, as expectations were met with no policy changes. Domestic economic data presented a mixed picture, with industrial production declining more than anticipated.

Across Asia, excluding Japan, equities rallied, with Singapore leading the charge, closely followed by Greater China markets. China's shares benefited from positive economic news, although concerns of reduced policy support from Chinese authorities limited gains. South Korean and Indian shares, however, underperformed, with the South Korean economy unexpectedly contracting in Q1, and the Indian central bank reducing its benchmark interest rate to spur growth. Malaysian and Indonesian stocks also displayed weaker performance.

Supported by favorable economic data and accommodating policies of major central banks, risk appetite persisted, leading to higher government bond yields and robust performance in the corporate bond sector.

In the US, 10-year Treasury yields increased by nine basis points during April, driven by encouraging labor market data and Q1 GDP growth surpassing expectations. Similar trends were observed in German 10-year Bund yields, while Spain's 10-year yields outperformed Germany's following positive GDP data and the victory of the incumbent socialist party in the general election.

In the UK, government bonds underperformed as the Brexit deadline extended to October and domestic data surpassed forecasts, causing 10-year yields to rise by over 18 basis points.

Corporate bonds continued their strong performance, with high yield outperforming investment grade. The ICE BAML Global Corporate index returned 0.5%, delivering an excess return over government bonds of 0.9%, while the global high-yield index recorded a return of 1.3%.

Emerging market bonds maintained stability, with EM corporates surpassing government bonds. Hard currency bonds yielded marginal positive returns, whereas local currency bonds incurred minor negative returns due to turmoil in Argentina and Turkey.

Throughout April, the MSCI World index achieved a 3.2% gain, while convertible bonds, measured by the Thomson Reuters Global Focus index, demonstrated a 1.6% rise in US dollar terms, contributing to a marginal increase in valuations.