Macro: Sandcastle economics
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Saxo’s Quarterly Update: A deep-dive into asset class performances
Charu Chanana
Head of FX Strategy
Summary: Q1 was a roller-coaster with sustained inflation pressures but fresh concerns arising from banking turmoil. Crypto led the gains across asset classes as alternative stores of value were sought, with Gold also being in favor. Semiconductor and tech sectors and equities outperformed, and investors also flocked into safer bonds. Commodities, except industrial metals, lagged in Q1 amid ramping global demand concerns.
Q1 was a relief for markets after a tough 2022. Nonetheless, it was a bumpy ride, having started on a positive note with growth reacceleration calls picking up in January before inflation concerns picked up again in February. March was however marked with concerns of a banking crisis and financial contagion bringing the financial conditions to be the tightest in the cycle, but the quarter has ended on a calm note suggesting no risks of a systemic crisis as authorities stand ready to support with needed measures. Still, concerns of a recession have been brought forward with bank tightening lending standards as deposits dwindle.
Equities: NASDAQ leads, India lags
Broad gains were seen in equities in Q1 as central bank tightening bets were pared due to concerns of a financial contagion. However, equities have refused to price in a higher equity risk premium for now despite heightened concerns over economic growth. NASDAQ 100 led the gains, up 20.5%, as a tumble in Treasury yields, as well less funding requirements for cash-rich big tech stocks made them a safe-haven in the environment of banking concerns. MSCI Taiwan and Korea pushed higher due to the outperformance in semiconductor stocks, while India was a laggard due to Adani crisis and rich valuations. European stocks also had a strong quarter, with France’s CAC up 13% and German DAX up 12%.
Digging into the US sectors, semiconductor and technology outperformed while energy and oil & gas underperformed due to the drop in crude oil prices. Financials sector was also a key laggard due to the slide in bank stocks.
Fixed Income: Flooding into the safer government bond ETFs
We used ETFs to compare fixed income performance for the quarter. Gains were led by TLT, the US Treasury 20+ years Treasury Bond ETF, as investors rushed to safe havens amid sustained inflation concerns coupled with growth slowdown and banking sector fears. Meanwhile, high yield bonds remain out of favour as concerns of a credit crunch grow.
FX: Sterling and euro outperform, NOK and AUD underperform
The US dollar was choppy in Q1 amid fast-changing interest rate outlook. While sustained interest rate hike bets from BOE and ECB supported their currencies, retreating rate hike bets weighed on AUD. NOK, being the least liquid currency in the G10 space, was the most exposed to tightening global financial conditions, market volatility, and banking turmoil, ending the quarter the weakest.
Commodities: Tough quarter as demand concerns weighed
Weakness in the commodities space was mostly driven by energy as global demand concerns were a key focus first because of Fed’s rapid tightening cycle and later because of the tightening credit conditions. Grains started the year on a downbeat note but picked up some gains in March. Metals were the outperformer with iron ore up 10%, gold up 8% and copper up 7%.
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