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A white knuckle ride of a quarter

17 Apr, 2023 | Return|

The balancing act performed by central banks trying to tame inflation and avoid recession became harder in March as a new fault line emerged in the banking sector. However, despite the crises at Silicon Valley Bank and Credit Suisse, the banking system as a whole is substantially more robust than it was before 2008’s financial crisis.

Headline rates of inflation should continue to decline thanks to a mild winter, tumbling gas prices, easing of supply chain pressures and year-on-year base effects. ‘Core’ inflation, though, which excludes energy and food, may prove stickier.

This is in no small part because labour markets, consumer spending and economic growth have so far remained surprisingly resilient even as interest rates have soared from 0.1% to 4.25% in the UK and from 0.25% to 5% in the US in little more than a year. Unemployment rates continue to be close to 50-year lows in both the UK and the US. Wage growth, though, in real (after inflation) terms is currently still negative and prolonging the cost-of-living squeeze.

Finally, it is almost inevitable that there will be further issues caused by the abrupt withdrawal of ultra-cheap debt. Central banks might be forced to put financial and economic stability first and let up in their fight to crush inflation.

Below, Square Mile’s investment management team share their thoughts on the outlook for bond and equity markets, currencies, and alternative investments.

Bond Markets

After a torrid 2022, bond markets delivered welcome gains to investors in the first quarter of 2023, but only after another white-knuckle ride. In January, falling inflation stoked optimism that peaks in interest rates would be lower than previously thought. However, in February economic data and fresh warnings from central banks showed that the battle against inflation had not yet been won, and reversed all of January’s gains and more. Bond markets rallied once again, though, in March as the failure of several banks rekindled fears of recession due to tighter credit conditions. This revived hopes that central banks would be cutting interest rates before the end of the year.

The outlook for bond markets continues to appear finely balanced.

Equity Markets

Mirroring the performance of bonds and for the same reasons, stock markets got off to a barnstorming start to the year. Global stock market indices rose in January by more than 6% and the UK market was up by 4.5%.

All major stock markets, though, fell sharply at the beginning of March as the issues at Silicon Valley Bank and Credit Suisse evoked memories of 2008. However, swift action by the authorities and the absence of contagion meant investor confidence quickly recovered. Over the quarter as a whole, global equities were up by more than 7% in local currency terms and UK equities by just over 3%.

Although the immediate danger to financial stability seems to have been contained, we expect volatility to be an ongoing feature this year, making stock selection exceptionally important in 2023.


Compared to bonds and stocks, currency markets were relatively calm in the first quarter of 2023. Sterling was the strongest major currency, appreciating by almost 3% against the dollar and by just under 1% against the euro. In times of crisis, money usually floods into the dollar. The weaker trend in the US currency so far in 2023 therefore suggests that investors remain fairly sanguine about the overall backdrop and are not fearful that recent stresses in the banking sector are set to snowball.

Alternative Investments

  • Gold: Gold also followed the track in bond markets and benefited from its safe haven status when confidence in banks was jolted. Over the quarter, gold was up by almost 8% in US dollars and by 5% in sterling terms.

  • Cryptocurrency: The problems in the banking sector sparked a renewed flurry of interest in cryptocurrencies. Despite its first quarter gain, bitcoin is still almost 60% below its November 2021 peak.
  • UK Property Funds: The UK property fund sector remains in limbo as the FCA still has not announced how to resolve mismatches in liquidity and valuations of daily dealing funds with their underlying properties.
  • Absolute return: As always, funds in the absolute return sector produced a wide range of returns ranging from a gain of almost 8% to a loss of nearly 6% in the quarter. Despite higher yields making bonds more attractive than they were, we continue to believe that absolute return funds can provide an uncorrelated stream of returns and therefore have an important role to play in diversified portfolios which use actively managed funds. The selection and combination of complementary funds, though, is critical to success in any allocation to the sector.


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