Markets corrected sharply during April spooked by the prospect of higher interest rates spurred by rising inflation. The prospect of aggressive policy action to tighten liquidity conditions saw the US Federal Reserve increase interest rates by 50 basis points following the 25bp rise in March and signalled a series of similar moves before the end of 2022. In addition to this, they announced their intention to allow their $9 trillion balance sheet to run-off at a rate of $95 billion per month from June onwards.
Faced with an emerging liquidity head wind, the US share market fell by 8.7% with the tech laden NASDAQ fairing even worse declining by 13.4%. First quarter earnings results in the US were reasonable but not sufficient to overcome the negative valuation impact of higher bond rates.
The Australian market fared much better than the US falling by just 0.9% buoyed by firm commodity prices and a lower exposure to long duration technology stocks. Bond markets were sharply weaker as yield curves began to factor in tighter liquidity conditions.
US 10-year treasuries were 53 basis points higher to finish at 2.89% while Australian 10-year bonds increased by 29 basis points to finish at 3.12%. In the corporate bond market, credit spreads also widened reflecting equity risk conditions.
The US dollar once again proved its safe-haven qualities by strengthening against major cross rates with the Australian dollar falling from $US 0.75 to $US 0.71 at month’s end. In commodity markets, oil and iron ore were relatively flat, however, natural gas continued its advance increasing by 30.4% due to supply shortages associated with the ongoing Russia-Ukraine conflict.