Explore the monthly market wrap-up, a summary of the key trends, emerging players and market movements.

Key market movements that caught our attention in April:

Japanese Yen lows and currency intervention.

The recent record lows in the Japanese currency have brought about a range of mixed effects for an economy striving to ignite growth. On Monday the 29th, Japan's yen plummeted to its lowest point in three decades. The yen's recent decline against a basket of currencies primarily stems from interest rate differentials. As discussed in my earlier monthly summary, Japan transitioned from negative to positive rates after being in negative territory since late 2015.

Japan's interest rates hold appeal for institutional investors seeking carry trades. In simple terms, this involves borrowing in a low-interest-rate currency and investing the funds in higher-yielding currencies. The influx of borrowed Yen into the market has pushed its value downward, resulting in elevated import prices. Japan has long been the world’s largest importer of liquefied natural gas (LNG), purchasing it in US dollars.

The persistent weakness of the Yen is expected to amplify domestic energy costs, prompting an already subdued economy to cut back on expenditures. Conversely, exporters are benefiting from a weakened Yen. The S&P Japan Exporters Index monitors the performance of companies with over 50% revenue exposure to non-Japanese markets, and it has shown robust growth year to date, increasing by 17.66%. Meanwhile, the Yen has depreciated by 10.86% against the US dollar during the same period.

The underperformance of the Yen has likely encouraged Japanese officials to intervene in the market, although no confirmation has been provided. Officials have refrained from commenting on the matter. The intervention, reminiscent of October 2022 when officials reportedly purchased US$60 billion of Yen to bolster the currency, aims to mitigate the effects of import price hikes and safeguard Japan's drive to increase real wages.

Middle East conflict crisis.

On April 19th, Israel launched a drone strike on Iran in response to Iran's earlier drone attack on the 13th. This action had a significant impact on the markets: stock futures declined and commodities surged in the aftermath. Oil prices surged by over 4% upon the reports of a strike, while gold experienced a nearly 2% jump. The tensions in the Middle East escalated during the week following Iran's initial drone attack, with an Israeli retaliation seemingly inevitable. However, tensions have subsided since the attacks.

The conflict is driving energy prices higher, prompting central banks to delay rate cuts. According to the World Bank's latest commodity report, a conflict-related supply disruption could push oil prices above US$92 a barrel, with Brent currently at US$85.46. Such elevated oil prices could significantly disrupt global inflation progress.

Moreover, further developments in the conflict may induce risk-off sentiment in equities and other high-risk asset classes. However, current ceasefire talks appear to be making progress, with Egypt renewing efforts to revive stalled negotiations between Israel and Hamas.

US interest rate outlook.

Throughout April, the yield on the US 10-Year Government Bond increased by 48 basis points, reaching its highest level since October of the previous year. This development presents a puzzling contrast to observations at the end of 2024 when the market had priced in 150 basis points of rate cuts for the year. Now, only 36 bps of cuts are factored in, marking a significant 76% reduction in expectations.


Source: TradingView

The increasing uncertainty surrounding the timing of rate cuts by the US Federal Reserve largely stems from the economic indicators used by the Fed as benchmarks. The phrase "more data is needed" has been consistently repeated this month, not only in the US but globally.

The economic data released in April presented significant challenges for the Fed, including soft ISM Services data, a lower unemployment rate, a higher CPI print, and a poor quarterly GDP result. These indicators diverge from the Fed's desired outlook, depicting an economy facing both contraction and persistent inflation, something like stagflation. The timeline for rate cuts by the Fed is expected to become clearer in 2025, as further data will likely cause resistance against cuts this year.

Will's March market comments:

"The lack of strong disinflationary data out of the US, will keep reducing expectations on a rate cut this year - even sliding cuts back to next year. Without meaningful convergence of US and Japanese interest rates, there will be no relief in the Yen. I expect that short sellers and carry traders will continue to target the Yen as intervention can not be sustained. We may see levels below 160 USD/JPY. Such low JPY levels will hinder consumer confidence and keep Japanese inflation subdued, leaving Bank of Japan officials with no case to hike rates, adding to existing pain for the Yen."

- William Smith, Dealers Assistant, BPC Wealth Management