Global financial markets reached record all-time highs in April due to strong corporate earnings releases, additional U.S. spending stimulus plans, and the Federal Reserve’s renewed commitment to stay strong in the face of mounting inflationary pressures. However, the last week ended mixed due to inflation and potential tax hike concerns. The vaccination campaign progress in the U.S. is helping contain the fourth covid-19 wave. However, the pandemic situation in India is very concerning as there is a shortage of vaccines, oxygen, and medical equipment, and national daily cases are near 400,000.
The S&P/TSX Total Return Index rose 2.18% in April on revived hope for a substantial economic rebound, which also lifted the Canadian dollar to its highest level in more than three years.
The Canadian loonie rose 2.24% to a three-year high against the greenback, after a 7.30% increase in crude oil prices. The Canadian loonie is strengthening because of the overall strength of commodity markets as all kinds of commodities Canada exports are at record highs or multi-year highs. The central bank’s hawkish tone, substantial economic growth expectations, and an increase in oil prices have contributed to the outperformance.
Moreover, the Canadian economy has returned within 1.3 percent of its pre-pandemic levels. The Canadian economy began its streak of unexpected strength at the start of the year, validating hopes that output would quickly rebound to pre-pandemic levels. In February, the GDP increased by 0.4 percent. According to preliminary estimates, output rose 0.9 percent in March, marking the 11th consecutive monthly increase in GDP.
The Bank of Canada provided an optimistic assessment of its economic prospects but maintained its key rate at 0.25 percent. The bank declared that it would reduce its purchases of federal government bonds as part of a quantitative easing scheme intended to aid the economy during the pandemic. It has increased its projections on when the economy will be healthy enough to withstand rising interest rates. The bank now expects inflation to rebound to its goal of 2% later in 2022, rather than 2023.
The S&P 500 Total Return Index finished April up 5.24%, buoyed by strong corporate earnings and upbeat economic data.
The rollout of COVID-19 vaccines, substantial government stimulus, and Fed monetary support also fueled hopes for a solid economic recovery. These tailwinds boosted equity gains and held markets at all-time highs. Nonetheless, a few market risk remains, such as inflation rising out of control and a pandemic escalation due to variants.
On the economic front, the U.S. economy expanded by 6.4 percent in the first quarter of 2021, mainly by U.S. consumption. This increase is likely to continue this summer as more vaccines are distributed, and COVID-19 cases continue to decline. Meanwhile, the economy added 916,000 jobs, the most in seven months. The U.S. unemployment benefits claims fell again last week to their lowest level in more than a year. Retail sales soared 9.8% in March, after dropping 3.0% the month before.
On April 28th, U.S. President Joe Biden unveiled a $2 trillion stimulus package to support the middle class by improving maternity leave and daycare, childcare, preschool, and college tuition for millions of people. He claims that higher taxes on businesses and the wealthiest would help pay for the plan. This proposal is in addition to his plan for $2.3 trillion in funding to build highways and bridges, improve internet coverage, and initiate other infrastructure projects.
Regarding monetary policy, the Fed retained its interest rate near zero and the pace of asset purchases at $120 billion a month. It reiterated that it plans to continue assisting the economic recovery amid recent inflation, economic growth, and job creation. In addition, the Fed stated that “inflation has risen, owing primarily to transitory factors.” The Fed has reiterated that it will not adjust the pace of bond purchases until it sees “substantial further progress” against its employment and inflation targets.
The MSCI ACWI Ex U.S. Total Return Index was up 2.56% in April, despite the Eurozone officially falling into a double-dip recession.
The Eurozone fell into recession in the first quarter of 2021, as predicted due to countries implemented new lockdowns and restrictions amid the third wave of coronavirus infection. However, the drag of the German economy on the rest of the region’s development was worse than expected. The rebound could accelerate in the coming months, but Europe will remain well behind the U.S. and Canada until 2022.
The European figures barely scratch the surface of a condition marked by significant disparities in economic growth across countries. Germany’s GDP fell by 1.7 percent during the quarter, while France was the only major EU nation to rise by a modest 0.4 percent. Spain and Italy were in line with the regional average, with GDP falling by 0.5 percent and 0.4 percent, respectively.
Following declarations from many governments this week, there are realistic expectations that the long-delayed €750 billion European economic stimulus package will finally see the light of day, with the first euros invested some time this summer. Finally, The ECB managed to keep its primary interest rate at minus 0.5 percent and the cap of its pandemic emergency buying scheme at €1.85 trillion.
The Portfolio Management Team