9th May 2022
The Cambridge Weekly – 9 May 2022
Market noise is almost deafening
The last week of April was like being on a roller coaster. We had rather hoped that the ride was almost over, but in fact it’s only been getting wilder. For the past five weeks, the asset markets have been displaying greater volatility. These charts are a way of demonstrating the phenomena we term asset market “noise and loudness.” We have taken the daily changes of the US equity and bond market indices (the S&P 500 and the Bloomberg Barclays US Aggregate index which includes corporate bonds), and then sought to standardize each. This puts both markets on an equal risk basis. We have then looked at the combination to get an idea of the total market volatility. The daily changes observed are shown in blue and look very similar to a sound wave.
April 2022: Monthly market returns review
April 2022 was not a strong month for global equities, which declined 3.5% for UK sterling investors as inflation pressures, rising yields and further discussions around interest rate hikes impacted returns. In regional terms, the US equity market dropped 4.3%. Declines were even more apparent for the US technology sector, down 9%, as further potential rises in interest rates put pressure on valuations. After several months of predicting action, the Federal Reserve (Fed) is now delivering on its policy shift to tackle inflation. Analysts predict 0.5% rate increases from each of the Fed’s next three meetings. A hawkish policy that Fed Chair Jerome Powell hinted was realistic and caused a reaction on bond markets; US 10-year yields rose by 0.56% in April, with global government bond yields rising also. Credit spreads also widened over the course of the month.
The outlook for oil
Global energy markets have seen quite the shakeup in recent years. After oil prices collapsed at the start of the pandemic, tighter supply and returning demand buoyed fuel prices for most of the last two years. Russia’s invasion of Ukraine have given prices an extra spark this year, as commodity traders scrambled to adjust to the biggest energy disruption seen in a generation. Last week we saw yet another historic moment in global energy markets: The European Commission vowed to wean the continent off Russian oil imports entirely.