Sailing the calmer waters – for now

Banking fears recede – JP Morgan & Citigroup report
Euro rising to one‑year high against the US Dollar
OPEC surprises the markets

After a turbulent ride in March, the markets have stayed rather cautiously optimistic in the calmed down trading during April. For the most part, market participants have followed the same trends of the recent months, with central banks’ playbook on the changing economic activity taking the prime spot. In the light of that, the developed markets stocks’ index MSCI World has risen by 1.59 %, whereas the emerging markets stocks’ index MSCI Emerging Markets has retreated 1.34 %. US bond yields on the 10‑year maturity bond have stayed stable at 3.55 % over the month, whereas the German bond yields on the 10‑year maturity bonds have largely stayed the same at 2.32 %.

Banking fears recede

The fears over the global banking sector, so rampant during the previous month of March, were more subdued during April. At least partially, the worries have been calmed down seeing the largest US banks (J.P. Morgan, Citigroup) reporting better‑than‑expected profits along with stable deposit rates, while admitting the road ahead could be more challenging. That could well play into optimists’ hands by signifying that the banking stress in the US has been constrained to the smaller institutions, so far, and the systemically important ones are, in fact, going strong. US regional banks, on the other hand, were still facing the dire headlines with First Republic bank getting the most of attention as it was pursuing “strategic options” after its customers withdrew 100 bn USD during March. At the time this publication was being finalized, First Republic Bank was in the process of being taken over by the largest US bank – J.P. Morgan.

OPEC cuts production

In early April, contrary to the previous forecasts, Organization of the Petroleum Exporting Countries (OPEC) has somewhat caught the markets by surprise in their decision to announce 1,16 million barrels per day (mbpd) oil output cuts – in addition to the cuts announced last autumn. In total, the planned oil production cuts amount to 3,66 mbpd or ~3,7 % of global oil demand. To reflect the changed oil demand and supply balance, the Brent oil price has jumped 5‑6 % in one go from ~80 USD/barrel to ~84,5 USD/barrel. To put this into perspective, the Brent oil price had fallen sharply from the highs of 120 USD/barrel in 2022 Jun to much lower level of 75‑80 USD/barrel in the second half of March in the wake of the banking turbulence in the US. Even though this decision has not brought the oil price back to the old highs, it is evident that oil cartel is trying to prop up the price of the black gold from falling any further, which could mean that taming of the inflationary pressures this year may take longer than expected.

Euro currency strength

In the US, investors have been aligning their views to reflect the declining inflationary pressures, together with less likelihood of further continued hikes in the interest rates by the Federal Reserve. That somewhat conflicts with the relatively strict stance by the European Central Bank (ECB), members of which have been quoted to support further interest rate hikes until core inflation and wage rises ease. In addition, the European economy fared better than expected during extraordinary rise in energy costs, at least compared to the forecasts of 2022 Autumn. Hence, taking into account the more aggressive hiking stance from the ECB, coupled with the improving or at least better‑than‑expected economic outlook in Europe, Euro zone currency euro has managed to recover a lot of ground this year vs the US Dollar. As a result, the days of below‑parity levels seemed long gone as the EUR/USD pair was trading at the 12‑month high above 1.10 (see chart).

Historical EUR/USD chart

“House view” update

The neutral risk allocation budget has stayed intact last month, as the divergent economic activity was not producing financial signals sufficient to move the needle into any of the directions of our portfolio positioning.

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