Market Review 04/2023

April was the month of consolidation – stock indices rose slightly, while government bond yields fell by a few basis points. The reporting season is almost over, with no major disappointments recorded. Looking beyond April, both the Federal Reserve System and the European Central Bank raised interest rates by 25 basis points at the very beginning of May, which was expected and did not add to the overall volatility. Players interpreted the message of the main bankers positively, seeing a hint that the rate peak in this cycle might have been reached.

The crisis of regional banks in the U.S. continues

Shares of regional banks in the U.S. continued their rapid decline, and it does not look like their troubles will end soon. First Republic Bank was easily “swallowed” by the biggest bank of America J.P. Morgan, and during the last week of April the whole list of regional players felt severe price pressures. With the cost of funding only getting more expensive, and assets earning less than these costs, the issue clearly remains quite problematic. Nevertheless, as we noted in our March review, this situation is hardly a threat to the financial system itself. Of course, one should not envy the shareholders of U.S. regional banks, but the ongoing (although forced) consolidation is rather a healing exercise. We do not expect a massive default on regional banks’ debt, so one can take a closer look at senior secured and senior unsecured bonds in this sector. We would not advise bottom fishing in equities of the troubled institutions though.

European and US equity markets

Precious metals move higher; dollar under pressure

Volatility is shrinking in DXY (dollar index) and EUR/USD pair. Market tested levels just above EUR/USD 1.10 once again, which are not giving up for now. We would still prefer for 1.10-1.11 area to hold on the upside and eventually see the pair drop through 1.0900 to trigger execution of stop-loss orders, which could take us all the way down to 1.0500 area, as market is currently overly positioned on the long side of the EUR/USD trade. Of course, the longer it takes the market to drop off the current levels, the greater is the risk for an upside progress towards 1.1200 and beyond.

Precious metals are getting more attention with each month. Gold keeps on its fight around XAU/USD 2000 levels, and we would still recommend taking rather cautious short-term position here, if you are planning to actively trade the metal. A «triple top» formation on the charts often signals a potential risk for a deeper setback before XAU/USD 2100 level will be broken on the upside. Silver managed to break a three-year-old downtrend thus giving another evidence for the bullish case. So far, XAG/USD 26.50 has proved to be too strong for the bulls to conquer, and, ideally, all dips should be now contained near 23 dollars per troy ounce mark. Next big hurdle on the upside is XAG/USD 27 level, which, if/when broken, will open the way to the round number of 30 bucks per troy ounce. Again, please consider the volatility of this market and choose your exposure accordingly.

Oil could not produce an extension of the bull run and its failure to hold recent lows just above 71 dollars per barrel might lead to a drop to its next major support near USD/bbl 63 mark. We consider this USD/bbl 60-63 area as an intriguing region to go strategically long oil. Natural gas is also weak and looks very «cheap» to our eye.

Gold price, USD/oz

Economic data comes out mixed

Eurozone factory activity continued to slow – S&P Global final manufacturing PMI decreased to 45.8 points in April compared to a reading of 47.3 in March. As consumer is getting weaker because of tight monetary policy and surging living costs, the demand for goods is falling. Yet Eurozone Composite PMI came in higher than expected at 54.4 led by increase in services, which posted their highest level since May of last year. Economic sentiment increased only by 0.1, which was well below expected number of 0.7, showing that there is not a lot of overall optimism.

China’s manufacturing sector kept on slowing down with official PMI showing sharp decrease by 2.7 points to 49.2 in April. While the economy grew faster than expected in the first quarter of the year, factory output has lagged because of weak global growth and demand. For the first time in last four months, services sector slightly struggled, with non-manufacturing PMI decreasing to 56.4 points compared to 58.2 in March, while still staying at one of the highest levels in recent years.

U.S. manufacturing activity recovered from last month’s low, coming in higher than expected at 47.1 in April from 46.3 in March. At the same time U.S. consumer sentiment improved – the University of Michigan’s monthly Consumer Sentiment Index increased by 1.5 points to 63.5 in April. U.S. labor market remained strong, with unemployment rate sitting at 3.4%, showing that tight monetary policy is still to have its effect on the market.

Benchmark 10-year bond yields

Not as bad as many might have thought

Earnings season is coming to its end, and, for now, it is proving to be not as bad as many expected. As of the moment of writing, 85% of S&P 500 companies had reported their first quarter results with 79% of them beating EPS expectations. Still, earnings are actually declining (average decline of 2.2%), and if numbers will stay negative until the end of the earnings season (and it looks those will), this will be the second consecutive quarter of earnings decline for S&P 500 companies. Nevertheless, we saw big tech companies like Meta, Microsoft, Apple, Amazon and others beating estimates and leading stock indices higher.

Overall, market conditions suggest that money will remain expensive and the fight for it will continue. This should put pressure on bond yields (duration of 10 year+), which, in turn, should keep the S&P 500 index in the resistance zone of 4 170 – 4 350. Let us also not forget the old saying “sell in May and go away”, which works much better in times of general uncertainty and stress.

High Yield bond Indexes