April ended with a cautious sentiment in the financial markets despite the favorable start to the corporate reporting season in the United States.
Investors took in a less rosy outlook for global economic growth from the World Bank and IMF, both cutting their forecasts for 2022 in the face of a more challenging outlook. In addition, the preliminary 1Q22 GDP of the US surprised the market with the first contraction since 2020 due to a sharp drop in exports.
In this sense, the dynamics of the market continues to be driven by a more restrictive monetary policy by the Fed, the escalation of the war in Ukraine and the rise in infections in China. In this way, investors anticipated an increase of 50 basis points by the Federal Reserve on Wednesday, following the latest more hawkish comments from its members. In addition, the curve discounts three additional consecutive hikes of the same magnitude and accumulates an adjustment for the remainder of the year of +240 basis points. The foregoing in an environment of high levels of inflation that have reached four-decade highs and prevailing disruptions in supply chains.
Regarding the last point, Russia suspended natural gas exports to Poland and Bulgaria, prompting more countries besides the US and UK to plan to join the gradual ban on imports of Russian crude. Meanwhile, lockdowns in China have slowed production in key cities, wreaking havoc on the economy and forcing the country to provide more stimulus.
Under this situation, financial assets trade in a highly volatile environment. Over the month, oil futures have fluctuated between gains and losses as a result of strong supply and demand pressures. For its part, the dollar posted its best monthly performance in a decade, advancing against all developed and emerging currencies, excluding the Russian ruble.
The dollar has been nourished by the strong sentiment of risk aversion in the market and a higher expected spread vs. benchmark rates from other countries. In particular, this situation is reflected in the dynamics of the Japanese yen, which positioned itself as the weakest currency within the G10 group, reaching its worst level in 20 years after confirming an accommodative monetary policy.
In EM, the Mexican peso returned to trade above the psychological 20.50 per dollar from 19.85 at the beginning of the month. For its part, on the equity front, widespread losses were recorded with the greatest adjustments in the North American stock markets. Meanwhile, global sovereign bonds extended the losses observed in 1Q22, although in April the pressures were concentrated on longer-term rates. It is worth noting that earlier in the month, the Treasuries curve temporarily inverted taking the 2/10 spread into negative territory for the first time since 2006, raising concerns of a recession.
Meanwhile, the 10-year MBono surpassed the 9.00% figure after accumulating a depreciation of around 80bp. Finally, we believe that the market’s attention will continue to focus on the evolution of the three factors mentioned above in the midst of a greater materialization of the global economic deterioration that continues to increase fears of stagflation, while the situation will continue to support the US dollar.
* Deputy Director of Fixed Income, Exchange Rate and Commodities of Grupo Financiero Banorte.