Markets Rally in April as Risk-on mode persists

Credit markets posted yet again another remarkable performance during the month of April, with European and US HY markets rising by 1.08% and 1.13%, as there seems to be no signs of the global search for yield abating for the time being. Price returns across both regions were the greatest contributors to total returns in both instances.

Economic data has been resilient, both in the Eurozone and in the US, and this was translated into yet another positive string of corporate results in the early days of Q117 earnings season whilst manufacturing and services data, as measured by PMIs have also surprised to the upside. Data regarding unemployment in Europe for example, has been creeping lower and has recently fallen to its lowest in almost eight years. Inflationary data has also been slowly ticking upwards, with the European Central Bank revising its forecast for inflation upwards to for 2018 and 2019.

Though it had been announced earlier, April marks the month whereby the ECB’s monthly asset purchase programme is scaled lower to €60bn from €80bn, though ECB’S Draghi acknowledged that the recovery is gaining ground, reiterating however that inflation is “not yet self-sustaining enough to justify an end of extraordinary monetary support.”

Towards the beginning of the month investors began to question the sustainability of the emerging-market revival that channelled almost $60 billion into assets of developing economies during the first months of 2017. While money is still flowing in, some investors were a bit weary, and held back from pumping more money in, as worries that the buying spree, which helped give emerging-market stocks and currencies their best quarter in two years, has resulted in heightened valuations

Geopolitical tensions heightened during the month. With tension growing between the U.S. and North Korea, there is elevated political risk from many angles. This coupled with the uncertainty in the run up to the French presidential elections halting flows into the asset class. However, following the first round of elections in France, flows picked up into emerging markets as the likelihood of Macron emerging victorious in the second round grew rife, fuelling a much needed end of month rally across all emerging market asset classes. Global emerging market high yield bonds ended the month 1.43% higher.

Investors were welcomed by positive trading screens in the aftermath of the first round of elections in France as risk-on mode moved from first gear to fifth gear in the initial minutes of the trading session post-election day, as risky assets rallied across the board. From High Yield bonds to peripheral bonds, to a strengthening euro to emerging markets, but European equities were the clear winners during the last few trading sessions of the month, particularly those highly exposed to France. The European banking sector was one of the key outliers, with equities and deeply subordinated bank debt rallying sharply. On the flipside, the safe haven government bonds particularly in Germany bore most of the brunt of the risk on mode which ensued.