Quarter in Review Q1 2023
- Quarter in review
- 28.09.23
Key themes
Global asset markets were volatile in Q1 amid rising economic headwinds and uncertainty around the trajectory of monetary policy. Despite this, both equities and fixed-income markets rallied over the period.
At the start of the year, there was optimism for a global ‘soft landing’ – i.e. an economic slowdown but no recession. As a result, risk assets posted strong gains in January. In February, however, this gave way to concerns around overheating amid sticky inflation, and central banks indicated that monetary policy may need to be tightened further and faster than previously anticipated.
The banking crisis then hit, in March, and again turned the outlook for monetary policy on its head.
Markets snapshot
The MSCI AC World equity index rose 7.2% (5.5% in euros) in Q1.
US equities rose 7.7% (5.8% in euros), as economic news flow improved compared to the slow momentum evident at the end of 2022, while expectations for the level of the fed funds rate at year end fell towards the end of the quarter.
Europe ex UK equities outperformed, rising 10.5% (10.2% in euros) as the eurozone avoided the recession many investors had been fearing at the end of last year.
The UK lagged, rising 3.2% (4.2% in euros), partly due to energy stocks which were impacted by the fall in the oil price during the quarter.
Pacific Basin equities also lagged, rising 3.1% (0.4% in euros) with Hong Kong equities down -1.9% on profit taking following the strong gains late last year on the announcement of the reopening of the Chinese economy.
The ICE BofA 5+ Year Euro Government bond index was up by 2.7% over the quarter. The German 10-year yield was volatile, at one point rising to its highest level since 2011 (2.77%) before falling with the emergence of the banking crisis, ending the quarter at 2.29%.
The euro was strong during the quarter, with EUR/USD up from 1.0705 at the end of 2022 to 1.0839 by the end of March, benefiting from expectations that the Fed was closer to the peak in its tightening cycle compared to the ECB.
Commodities fell -4.9% (-6.6% in euros), impacted by the prospect of demand destruction amid tighter credit conditions caused by the banking crises. Brent crude oil fell by 7.1% in Q1 to $79.8/barrel. European gas prices fell -36.1% as the European winter was relatively mild. Meanwhile, gold rallied by 8.0%, aided by the potential for lower interest rates, US dollar weakness and lower US real yields in Q1.