The stand-out event during the month was the fall-out from the indecisive Italian election in March. An unlikely coalition of the anti-establishment Five Star movement and the far right League was finally able to form a government in May, only to have their nomination for Finance Minister overturned by the President on the grounds of the anti-euro views of the proposed minister and the perceived risk to stability. Investors, increasingly nervous about the populist, anti-euro views of the coalition parties and their policies of radical economic reform, took fright as it seemed the coalition would use this as an opportunity to push for another election, in which the populists could substantially increase their voting share, potentially increasing the risks of

Italy exiting the euro. Eventually a compromise was reached and, with a different finance minister, the coalition formed a new government. However, the damage to Italy’s bond markets and perceived credit worthiness was still apparent. With a government debt to GDP ratio of 130%, one of the highest in the world, Italy remains vulnerable, despite the better performance of its economy in the past year, while many Italians reject the budgetary constraints imposed by what is seen by some as an over reaching Brussels bureaucracy. The conundrum for the Eurozone remains; a single currency without full banking and fiscal unification is inherently unstable and prone to bouts of stress, leading to recent calls for reform.

While geopolitics dominated the headlines in April, it was economic factors that primarily drove markets during the month and underpinned the recovery in most risk assets after sharp falls in previous weeks. Developed market equities rose 1.1% while fixed income markets witnessed declines in credit spreads with gains in high yield bonds despite weakness in government bond markets. However, the most notable and important moves came in an acceleration in the recovery of the US Dollar and a rally in oil prices.

From its low point in mid-February, the US Dollar had already been recovering, but the trend accelerated in April with the Dollar rising by 2.1% on a trade-weighted basis. The trend has been supported by continuing optimism around the US economy, despite a relatively subdued Q1 GDP growth reading of 2.3% and increasing evidence of an upturn in inflation. In response to the uptick in inflation, the Federal Reserve appeared mildly dovish in its April meeting, indicating it was prepared to tolerate a period of overshoot in inflation above its 2.0% target, however investors are anticipating a further rate increase in June and another before year end. This pushed the yield on two-year Treasuries to 2.49% by month end, its highest level since mid-2008.