Our last note in this series at the end of February spoke of the narrative for the central banks, and US Federal Reserve in particular, shifting to more of a wait-and-see mode from December’s expectation of multiple rate cuts for the year ahead.

US employment data has remained firm since, and their inflation data has been on the uncomfortable side of expectations, so the Fed has switched from ‘three rate cuts this year’ back to hold.  

Bond markets took their cue, and the US ten-year Treasury yield has moved from 4.25% up to 4.6% while here the ten-year Gilt yield has moved from 4.1% to 4.3%.  Both of these bond markets have now given back the gains of November and December, it has been an uncomfortable few months for fixed interest investors.

This backdrop has taken its toll on sentiment everywhere and equity markets, which had carried on regardless in March, ran out of steam in April.  The chart below shows ten years of the earnings yield from the S&P 500 against short-dated US Treasury and corporate bond yields, we highlighted this chart last year as one to watch and this year’s move in the earnings yield against the move in bond yields was really flashing red warning lights, right. 

The position is a lot less clear for the other central banks.  It does still appear likely that the European Central Bank will proceed with a first cut in June while the Bank of England probably should do, assuming the May and June inflation figures are as benign as expected.

The leading equity markets sold-off in April though, for once, the UK was the exception being up over the month.  Having been bombarded with data recently as to the huge weight of selling of UK equities in favour of moving international, I am tempted to think that this might be a turning point, UK equities certainly do look cheap in an international context.  A chart of the UK data equivalent to the S&P 500 data above would show the FTSE All-Share earnings yield, which is close to 7%, markedly higher than the two-year Gilt at 4.4%.  Time to be a shade contrarian.

In America, the NASDAQ slipped 4.5% in April with the Magnificent 7 no longer providing leadership, Meta Platforms gave a dull forecast and fell 11% and Microsoft slid 7.5%.  Alphabet (Google) was the exception with an 8% gain after excellent figures and Tesla recovered 4% (but is still down by a quarter over the year so far).  ‘Old Tech’ had a poor month with IBM down13% and Intel by 30%.  We should add though that the reporting season is going well and corporate America appears to be in rude health, with nearly 75% of companies having reported, JP Morgan report that 78% of companies beat earnings estimates: “EPS growth for these companies is at +4% y/y, surprising positively by 9%.  Commodity sectors and Healthcare are down on a yoy basis, while Discretionary, Tech and Communications Services are seeing robust earnings growth.  Topline growth is printing at +4% y/y, surprising positively by 1%.”

In London, the market was led higher by Anglo American, which was in receipt of a bid from BHP (the consequent fall in BHP has no effect on the indices as they quit the UK a while back...).  But it wasn’t just that excitement, there was a 13% gain for AstraZeneca after good figures and, right at the end of the period a jump for HSBC after reasonable figures and the announcement of the departure of their Chief Executive, Noel Quinn.  All the banks gained after their reports, notably NatWest and Barclays and the oils gained (I note that Shell’s CEO and FD are indulging in the time-honoured tradition of complaining that their share price is too low and doesn’t reflect the value in the business).

The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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