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Monthly Market Roundup - covering April 2017

Article | 04 May 2017

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A general view of the public who came to see Emmanuel Macron

We review global market developments in April, highlighting the best and worst performing sectors globally.

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Global overview

  • Global stock markets for the most part rose in April
  • Equity markets in Europe surged following the first round of the French presidential election
  • Strengthening emerging equity markets edged past those in developed markets for the fourth consecutive month

In April, global stock markets were primarily driven by encouraging US and European corporate earnings results for the first quarter of 2017, an outline of US President Donald Trump’s tax reform proposal and geopolitical developments in Syria, North Korea and Europe. Notably, markets globally responded positively to the outcome of the first round of the French presidential election, which is regarded as being supportive of the on-going European recovery. Coupled with positive − albeit moderate − economic growth, improvements in labour markets and strengthening manufacturing conditions globally, the MSCI AC World index managed to extend its run of positive monthly performances, returning 1.61% (total return, US dollar) in April. For UK investors, however, April’s performance was negative in sterling terms, returning -1.8% as most currencies recorded gains versus a softer US dollar. Nonetheless, the MSCI AC World index has delivered a robust 3.88% (total return, sterling) in 2017 so far. At the sector level, performances continued to be mixed across regions. However, investors’ expectations in higher oil prices continued to be capped by the prospect of faster growth in US oil production.

US equity markets kicked off April on a more volatile note, with the S&P 500 index experiencing its biggest one-day reversal since February 2016 at the start of the month. This was primarily attributed to the release of the US Federal Reserve’s (Fed) March meeting minutes that revealed its intention to start unwinding its sizable US$4.5 trillion balance sheet later this year. Despite a moderation in growth year-to-date and mixed economic data released in April, such a move supports the Fed’s longer term outlook for positive growth, rising inflation and eventually tighter policy to drive market prices over the medium-term. Meanwhile, President Donald Trump’s tax reform plans announced in April were welcomed by investors, despite lingering scepticism. Coupled with encouraging first quarter corporate earnings releases, the S&P 500 index extended its run of consecutive positive monthly performances in April. However, it remained negative in sterling terms, as the pound gained back some lost ground versus the US dollar in April. Year-to-date 2017, the S&P 500 index has delivered a robust 2.34% (total return, sterling).

In the UK, the market sold off sharply in response to Prime Minister Theresa May’s call for a snap general election in June, before recovering strongly following Emmanuel Macron’s victory in the first round of the French presidential election. Sterling rallied to a six month-high relative to the US dollar on the news, exerting downward pressure on overseas investors. This resulted in significant divergence between the internationally-weighted FTSE 100 index, which sold off sharply, and the mid cap FTSE 250 index, which hit a record high nearing month-end. In contrast to the resilient signals recorded since the EU Referendum, economic data released in April suggested the beginnings of a slowdown in the UK economy.

Across Europe, equity markets surged in a relief rally following the first round of the French presidential election, sending the FTSE World Europe ex-UK index to levels not seen since 2015. After the initial round of voting on 23 April, centrist-candidate Emmanuel Macron and far-right candidate Marine Le Pen made it to the final round on 7 May. The result was positively welcomed by investors, as Macron’s reformist agenda and commitment to the European project should be supportive to the European economic recovery.

Following a disappointing start to the month, Japan’s equity market recovered towards the end of April, finishing slightly higher in local currency terms. This correction was driven by the strengthening yen versus the US dollar amid heightened geopolitical risk and uncertainty surrounding the French presidential election. Mid-April, geopolitical fears dissipated, causing the yen to give back some of its earlier gains and the equity market to rebound. Japan's macroeconomic data releases for March were generally stable. The Consumer Confidence Index rose to its highest level since just after the launch of Abenomics, while the unemployment rate fell to a 22 year low. Against this backdrop, the Bank of Japan views the current economic growth as a period of ‘moderate expansion’, and is retaining its ultra-loose monetary stimulus.

Asian equity markets generally had a positive month in April, with most countries posting positive returns, as stronger-than-expected economic data helping to brush off concerns over geopolitical issues in Europe and North Korea. In China, quarter one GDP growth was slightly better than expected at 6.9% year-on-year, compared to 6.8% in the fourth quarter of 2016. While there have been less fears on capital outflows and Chinese yuan depreciation, this has been offset by concerns over policy tightening.

Finally, emerging equity markets edged past their counterparts in the developed world for the fourth consecutive month. Notably, EMEA (Europe, Middle East & Africa) performed the strongest. Slightly reversing the trend seen over recent months, Latin American equity markets struggled to gain ground, with currency depreciation and lower commodity prices weighing on sentiment.

US

  • Prospects of tax reforms and an improved corporate earnings outlook kept the S&P 500 index in positive territory
  • Despite a first quarter slowdown in GDP, the US economic recovery remains on track
  • US oil oversupply concerns and fluctuating oil prices contributed to extended weakness in the energy sector

US equity markets kicked off April on a more volatile note, with the S&P 500 index experiencing its biggest one-day reversal since February 2016 at the start of the month. This was primarily attributed to the release of the US Federal Reserve’s (Fed) March meeting minutes that revealed its intention to start unwinding its sizable US$4.5 trillion balance sheet later this year. Due to its size, unwinding the balance sheet would not only impact markets, but essentially amount to a Fed interest rate hike. Despite a moderation in growth year-to-date and mixed economic data released in April, the move supports the Fed’s longer term assertion for growth, rising inflation and eventually tighter policy to drive market prices over the medium-term. Meanwhile, although markets remain sceptical about the US administration’s ability to successfully push through its policy agenda, President Donald Trump’s tax reform plans announced in April were welcomed by investors. Coupled with initial encouraging corporate earnings releases for the first quarter of 2017, the S&P 500 index extended its run of consecutive positive monthly performances, returning 1.03% (total return, US dollar) in April. However, it remained negative in sterling terms, returning -2.35% as sterling strengthened against the US dollar during the month. Nonetheless, the S&P 500 index has delivered a robust 2.34% (total return, sterling) for 2017 so far.

At the sector level, April’s performance picture mimicked results in March, with positive performances coming from stocks in the consumer discretionary and information technology sectors, while telecommunications, energy and financials lagged behind. Of note, concerns about geopolitical developments in North Korea, Syria and the French election led to a greater interest in perceived ‘safer’ bond-like areas of the equity market and ‘safe haven’ assets, such as gold, and a reduction in demand for assets that are perceived to exhibit more risk. Elsewhere, despite some encouraging first quarter corporate earnings announcements from oil companies, notably from Chevron, and an intermittent price rise towards mid-month, weakness in the pricing power of oil extended into April. The modest lift in oil prices reached its peak mid-month, only to fall again, reflecting a persistent worry among investors that the growth in US shale oil production and high US crude inventories will lead to lower oil prices in future. Year-to-date, the oil and gas sector in aggregate has lagged behind most others in the equity market.

In economic news, data released by the US Commerce Department at the end of April showed that US real GDP for the first quarter of 2017 exhibited signs of slowing down. According to the ‘advanced’ estimate, the US economy grew at a 0.7% annual rate in the first quarter, below market expectations and its slowest growth since the first quarter of 2014. This was mainly attributed to weak auto sales and lower home-heating bills, which dragged down consumer spending, offsetting a pickup in investment led by housing and oil drilling, which underpinned the recovery in US shale oil production. The slowdown also was reflected in the seasonally adjusted Markit Flash US Composite Purchasing Managers' Index (PMI) Output Index, which recorded a 52.7, down from 53.0 in March. The latest expansion of business activity, its weakest since September 2016, suggests a modest loss of momentum in both the service economy and the manufacturing sector. Service providers, however, remain optimistic about growth prospects over the coming year, with the degree of positive sentiment rising to its strongest level in three months. While the US economy only gained a lower-than-expected 98,000 jobs in March, overall unemployment levels fell to 4.5% according to the US Bureau of Labor Statistics, the lowest rate since May 2007, underpinning the Fed’s confidence in its economic outlook and positive path of the US recovery.

In corporate news, merger and acquisition (M&A) activity remained steady in April. Activity in the consumer staples space saw US-based consumer group Post, the maker of Post Raisin Bran and Honeycomb, announce its purchase of iconic UK household brand Weetabix in a deal worth US$1.76bn, acquiring the company from its current Chinese owners. The move would support Post’s ongoing efforts to consolidate parts of its cereals, snacks and protein bar markets. The month also saw further consolidation in the US healthcare sector, with US drug distributor Cardinal Health seeking to acquire the medical supplies business from Medtronic, a key medical device maker, for close to US$6 billion.

European

  • European equity markets rose in April following the French vote
  • Macroeconomic data signalled a strong start to the second quarter of 2017
  • Eurozone headline and core inflation rose to 1.9% and 1.2% respectively

European equity markets surged in a relief rally following the first round of the French presidential election, sending the FTSE World Europe ex-UK index to levels not seen since 2015. After the initial round of voting on 23 April, centrist-candidate Emmanuel Macron and far-right candidate Marine Le Pen made it to the final round of the race (taking place on 7 May). The result of the first ballot was positively welcomed by investors given expectations of Macron winning the face-off. His reformist agenda and commitment to the European project should be supportive to the European economic recovery currently underway, and could lead to a significant reduction in political risk premium in Europe.

On a sector level, cyclical areas of the market (i.e. more sensitive to economic cycles) performed strongly in April. The industrials sector was the leading outperformer, followed by the financials sector. Meanwhile, the telecommunications and utilities sectors were the biggest laggards, dragged by a rise in government bond yields in the latter part of the month. On a stock level, Kering, the French luxury group, was among the best performers. The company’s share price jumped by around 17% after one of its key brands (Gucci) posted an impressive 48% organic revenue growth in the first quarter of 2017. Biomerieux, the French health care equipment company was also among the best performers after reporting better than expected earnings. Meanwhile, the share price of Spanish lender Banco Popular Espanol fell in April after data showed deposit outflows. Suedzucker, the German packaged food company, also lagged in April, impacted by the end of the European Union quota system on sugar, which was thought to weigh on earnings through lower sugar prices.

On the macroeconomic front, data signalled a strong start to the second quarter amid buoyant demand and strong growth in employment. The eurozone composite Purchasing Managers Index (PMI), a private sector activity survey, accelerated to its fastest pace in six years. The economic confidence indicator, measured by the European commission, reached the highest level since the Global Financial Crisis in 2007. On the monetary policy front, European Central Bank (ECB) president Mario Draghi showed growing enthusiasm about the state of the euro-area economy, while cautioning that underlying inflation pressures remained too soft to contemplate paring back monetary stimulus. The ECB kept interest rates unchanged at record lows in April and maintained quantitative-easing, a programme it has pledged to keep in place until at least the end of the year. Nonetheless, economic resilience and the latest pick-up in headline and core inflation (figures rising to 1.9% and 1.2% respectively in April) are intensifying the monetary policy debate in the market and slowly pushing the ECB towards a discussion about ending the stimulus programme.

UK

  • Sterling rose strongly relative to the US dollar in response to the announcement of a snap general election
  • UK GDP rose 0.3% in the first quarter of 2017, underperforming the Monetary Policy Committee’s 0.6% target
  • UK retail sales declined 1.4% in the first quarter; online sales increased 19.5% year-on-year

Political events continued to dominate UK equity market movements in April. Financial markets sold off sharply in response to Theresa May’s call for a snap general election, before recovering strongly alongside European equity markets following Emmanuel Macron’s victory in the first round of the French presidential election.

Members of parliament voted overwhelmingly in favour of Mrs May’s move to gain a proper mandate for leadership and strengthen the nation’s position through the Brexit negotiations. Sterling rallied to a six month-high relative to the US dollar on the news, exerting downward pressure on overseas investors. This resulted in significant divergence between the internationally-weighted FTSE 100 index, which sold off sharply, and the mid cap FTSE 250 index, which hit a record high nearing month end.

In contrast to the resilient signals recorded since the EU Referendum, economic data released in April suggested the beginnings of a slowdown in the UK economy. UK gross domestic product (GDP) rose 0.3% in the first quarter of the year, underperforming the Monetary Policy Committee’s 0.6% target and less than half of the 0.7% growth in the fourth quarter. UK retail sales declined 1.4% in quarter one, recording the most significant drop in nearly six years. Online retailers fared better than their counterparts in physical stores however, with online sales surging 19.5% year-on-year.

On the corporate news front, UK utility companies were hit by news that the Conservative party would seek to address standard variable tariffs in its general election manifesto. Centrica, owner of British gas and the UK’s biggest domestic energy supplier, was among the biggest fallers following the announcement.

Full-year results from Barclays confirmed that the bank doubled underlying profits in 2017 quarter one, but the market reacted negatively to disappointing fixed income and equity trading from the group’s investment bank. Chief executive Jes Staley came under scrutiny during the month over attempts to identify a whistleblower.

Whitbread – owner of Premier Inn and Costa Coffee – warned of a “tougher consumer environment”, as full-year results missed analyst forecasts; market disrupter Airbnb and the rise of artisan cafes have challenged the outlook for the FTSE 100 leisure group’s hotel and coffee shop businesses. By contrast, online fashion retailer boohoo.com reported significant growth across all of its markets, nearly doubling profits in the year to February. AstraZeneca reported strong progress in drug innovation during the first quarter; chief executive Pascal Soriot said that 2017 will be a pivotal year for AstraZeneca, particularly for the company’s oncology pipeline which has a number of key trial read-outs scheduled through the second half of 2017.

Asia Pacific

  • Economic data was supportive of Asian equity markets
  • South Korea’s equity market edged close to an all-time high despite geopolitical tensions
  • Japan’s equity market performance was impacted by currency movements

Asian equity markets generally had a positive month in April, with some stronger-than-expected economic data helping brush off concerns over geopolitical issues in Europe and North Korea, as well as fading confidence in President Trump’s ability to stimulate the US economy. However, returns from Asian regions were slightly negative for UK investors, as sterling rebounded relative to most Asian currencies over the month.

In China, quarter one GDP growth was slightly better than expected at 6.9% year-on-year compared to 6.8% in the fourth quarter of 2016. While there have been less fears on capital outflows and Chinese yuan depreciation, this has been offset by concerns over policy tightening. Chinese bank performance was disappointing in April, as regulators tightened restrictions on shadow banking.

South Korea’s equity market edged close to an all-time high, despite Chinese trade restrictions and mounting tensions with North Korea. Investors appeared willing to put these risks to one side amid a brightening global environment, which has led to a rebound in exports growth this year, with stronger-than-expected growth of 24.2% (year-on-year) in April.

The Philippines’ equity market was the largest gainer thanks to strengthened earnings expectations and positive sentiment around tax reforms, while Indonesia and Malaysia also enjoyed a decent month, having lagged the broader market year-to-date. Australia’s equity market trailed slightly, impacted in part by increased concerns about housing affordability and a large sell-off in the iron ore price.

Following a disappointing start to the month, Japan’s equity market recovered towards the end of April, finishing slightly higher in local currency terms. This correction was driven by the strengthening yen versus the US dollar amid heightened geopolitical risk (mainly related to the Middle East and North Korea) and uncertainty surrounding the French presidential election. Furthermore, the release of the Federal Open Market Committee’s minutes confirmed a dovish stance on US interest rates, which added to concerns about the strength of the yen relative to the US currency. Mid-month, geopolitical fears dissipated, causing the yen to give back some of its earlier gains and the equity market to rebound.

Japan's macroeconomic data releases for March were generally stable. The Consumer Confidence Index rose to its highest level since just after the launch of Abenomics, while the unemployment rate fell to a 22 year low. Retail sales remained on an upward trend boosted by high car sales volume. Against this backdrop, the Bank of Japan views the current economic growth as a period of ‘moderate expansion’, and is retaining its ultra-loose monetary stimulus.

Emerging Markets

  • Interest rates were cut in Russia, and Erdogan wins the Turkish constitutional referendum
  • The monetary easing cycle continued in Brazil
  • South Africa shrugged off its credit rating downgrade from S&P and Fitch

Emerging equity markets edged past their counterparts in the developed world for the fourth consecutive month. Among the emerging market regions, EMEA (Europe, Middle East & Africa) performed the strongest, led by Poland, Greece and Turkey. Equity markets in emerging Asia also advanced higher, with all countries except Thailand posting positive returns. Slightly reversing the trend seen over recent months, Latin American equity markets struggled to gain ground, with weakness most pronounced in Peru, Colombia and Chile. Aside from gold and natural gas, commodity prices declined. From a sector perspective, technology and consumer discretionary performed well, while materials and utilities were the only sectors that ended in negative territory.

After another strong monthly performance, Poland consolidated its position as the best performing emerging equity market year-to-date. Polish insurers led the latest advance, drawing support from upbeat first quarter earnings results. Financial markets in Turkey reacted positively to President Erdogan’s narrow victory in the constitutional referendum, with the Turkish lira appreciating 2.4% versus the US dollar. The Central Bank of Russia cut its policy interest rate by 50 basis points to 9.25%, stating that it expects inflation to moderate to its target of 4% before the end of 2017. The annual inflation rate slowed to 4.3% last month as rouble strength continued to drive non-food inflation lower. Equity markets in South Africa shrugged off the credit ratings downgrade from S&P and Fitch. Interest rates were kept on hold at 7% despite core inflation easing to below 5% year-on-year in April, the lowest level in over four years.

Equity performance in Latin America was disparate, with currency depreciation and lower commodity prices weighing on sentiment, particularly in Peru and Colombia. By comparison, Mexico’s equity market eked out a modest gain, while Brazil remained flat for the month. Sector returns were mixed, with healthcare and consumer staples the strongest performers, and materials and energy being the laggards. During April, the Brazilian Government made further progress in implementing structural reforms – a labour bill was approved in the Lower House, which was an important victory for the Government. On the economic front, the easing monetary cycle continued, as Brazil’s central bank lowered its benchmark interest rate by 100 basis points to 11.25% and signalled another cut could be on its way. Economic news from Mexico was generally positive, with new jobs being created in the strengthening manufacturing sector. The country’s unemployment rate dropped to 3.2% in March. In other developments, the new US administration announced that President Trump had agreed “not to terminate the North American Free Trade Agreement”.

Fixed Interest

  • French government bonds rallied following the first round of France’s presidential election
  • Sterling rallied to its highest level relative to the US dollar since September 2016
  • The Bank of England completed its corporate bond purchase scheme

April was a month of two halves for bond markets. During the first half, geopolitical concerns, uncertainty about the French presidential election and the recent corporate bond rally (driven by policy expectations of the US administration) weighed on corporate bond returns and increased demand for government bonds. Sentiment shifted in the second half of the month amid reports of relatively strong corporate earnings and a more market friendly outcome to the French presidential election.

At the start of the month, the US President’s decision to take military action in Syria and to adopt a more aggressive stance toward North Korea helped raise demand for so-called “safe haven” assets such as government bonds.

Meanwhile, in Europe, polls for the first round of the French presidential election showed a relatively small spread of votes between the four candidates. The market was particularly concerned about a potential second round run-off between the hard left candidate, Jean-Luc Melanchon and far right candidate, Marine Le Pen. The subsequent win for market friendly candidate, Emmanuel Macron helped remove the risk premium that had been priced into European bond markets. Subsequent polls showing that Macron is likely to comfortably beat Le Pen in the second round further helped buoy returns.

In the UK, Prime Minister, Theresa May’s decision to call a snap election on 8 June helped sterling to rally. The market’s interpretation (based on polling data) is that the likelihood of an increased Conservative party majority reduces the probability of a so-called ‘hard Brexit’. By 30 April 2017, the pound had rallied to 1.29 against the US dollar, while on a trade weighted basis, data from the Bank of England shows the pound at an index level of 78.76. In both cases this is the currency’s strongest position since September 2016.

Of further note in the UK was the Bank of England’s announcement, 11 months ahead of schedule, that it has completed the £10bn of corporate bond purchases, which formed part of its latest quantitative easing programme.

Merrill Lynch reports the following index returns: German Bunds 0.1%, French government bonds 1.5% and Gilts 0.3%. Sterling investment grade (IG) corporate bonds returned 0.6% while euro IG corporate bonds returned 0.5%. Meanwhile, European currency high yield corporate bonds returned 1.1%. Euro financials returned 0.5% on the month while sterling financials were up 1.2%. Contingent Capital bonds (the lowest ranking form of bank debt) returned 2.5%.1

1All return data is sourced from Merrill Lynch and shows total local currency returns

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