Monthly Market Commentary - April 2023

Global stock markets posted positive returns in the first quarter of 2023, with the MSCI All Country World Index returning 4.5% for a sterling-based investor. Bond markets are also higher year-to-date, as investors are starting to expect an imminent end to the cycle of increasing interest rate.  

Given the recent negative headlines regarding the banking sector it is perhaps surprising to some that equities gained in March. The collapse of Silicon Valley Bank (SVB) and government-brokered takeover of Credit Suisse by UBS caused heightened near-term volatility, but the aversion of a wider fallout has seemingly reassured investors for the time being.  

Although rising interest rates played a role in the demise of SVB and Credit Suisse, their downfall was largely due to factors specific to themselves – interest rate risk mismanagement at SVB and a prolonged period of poor performance from Credit Suisse – rather than indicative of systemic weakness. There’s been a feeling that the Federal Reserve (Fed) would continue raising rates until something broke, and SVB’s insolvency, along with troubles at other US regional banks, means this bar has been met.  

While the Fed increased rates after SVB went insolvent, expectations for further increases have diminished with derivatives markets once more pricing in cuts before year end. Since the Fed embarked on its interest rate rising cycle just over a year ago they have lifted the funds rate from 0.25% to 5.00%. The full impact of this rapid increase is yet to be fully felt in the broader economy due to the inherent monetary policy lag and although recent economic resilience has been pleasing, weakness may lie ahead.  

Bond markets came flying out of the traps in January, but the strong rally fizzled out in February due to persistently strong economic data. Recent turmoil in the banking sector reinvigorated calls for an imminent end to central banks increasing rates and bond prices moved firmly higher while equity markets were hit by bouts of volatility.