Global equity markets had their worst month since March 2020. The perfect storm of central bank tightening, economic growth momentum fading and the earnings outlook becoming more challenged contributed to overall risk-off sentiment.
Bonds lost ground during the month as rising inflation and monetary tightening had an equally negative impact on fixed income. Credit spreads also widened for investment grade and high yield corporate debt. Gold did not do well either given its sensitivity to real yields.
The only asset class that performed moderately well was commodities. However, the commodity rally stalled towards the end of the month because of US dollar strength and concerns that fading economic momentum will ultimately take a toll on commodity demand.
Inflation and monetary tightening aside, the global economy was still holding up reasonably well given the circumstances. Negative US GDP growth in 2022Q1 was primarily driven by a negative trade balance. Consumers remained resilient as labor markets across the developed world remained very tight. Unemployment is now close to pre-2020 levels in both the US and UK. Forward-looking purchasing manager indices softened but remained well in expansion territory for major regions with the exception of China.
In spite of these silver linings, overall news flow was negative, which drove investor sentiment. The conflict in Ukraine continued as Russian forces focused their efforts on southeastern Ukraine. Lockdowns have closed down many parts of China’s economy which has led to a downward revision in growth projections. This will likely lead to a continuation of supply chain stress. Corporate earnings are beginning to converge into single digit territory after last year’s massive rebound. A number of large US tech companies published disappointing results for Q1.
Markets would normally look at policy support to ease the pain. This time though, sky high inflation is leaving central banks little choice but to maintain their plans to continue tightening. Therefore, investors had little reason to remain optimistic, which was reflected in price action during the month.
Mercer's Monthly Market Monitor provides an overview of global financial markets.
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