Senior Investment Editor
Summary: Financial markets these days are like a misaligned date - showing mixed signals. Is this going to be a positive experience or not? You can find arguments for both, but sour data out of China seems to have been the dominationg factor in May, while other data is showing positive signs such as easing inflation in Europe. Whether bulls or bears will win the tug of war and whether the mixed signals will become more directional remains a big question going into the Northern hemisphere's summer months.
The broadest measure we use here – global equity performance – fell by 1.2% in May. While it’s been a busy month, the overarching headline for the negative numbers must be worries about Chinese activity slowing down. On the positive side, there are a few things to mention such as a relatively positive earnings season, AI hype (for most of the month), easing EU inflation and a hopefully undramatic debt ceiling agreement in the US. It can be argued whether the market impact of some of these events was more neutral than positive, along the same lines as the FOMC meeting early in the month, where the Federal Reserve hiked interest rates again, with an outlook to possibly taking a break.
US 0.2%
US equities are almost the perfect showcase of the standstill that financial markets find themselves in these days. The performance basically ended flat for the month despite a lot of action – especially on the macro-political side. Early in the month, one of the most anticipated FOMC meetings in quite a while took place and ended much as people expected. The debt ceiling negotiations also took place in May and seem to be over without any real fuss. Artificial Intelligence stocks have been very much in focus for most of the month in a positive light. But later in the month, they also took a turn down as the valuation of these equities was brought into question.
Europe -3.2%
Despite being the outperformers of the past year, European stocks disappointed in May, falling 3.2%. On the top line, this move can be a head scratcher, as several European economies showed signs of easing inflation during the month. But it seems as though weak data coming out of China indicated faster-than-expected slowing of production in companies strongly connected to the eurozone took precedence. Simultaneously, the worries about how the US debt ceiling negotiations would end sent negative karma across the Atlantic, despite the chilled outcome.
Asia -1.2%, Emerging Markets -1.9%
Both Asia and Emerging Markets regions are quite interesting in evaluating May’s performance figures, as both regions are heavily dominated by Chinese equity performance and that has not been a pretty story. Several key figures regarding production and activity in China have indicated a faster and quicker downturn than most experts anticipated. This has sent Chinese equities down by a rather wide margin. As mentioned, that has sent tremors westward, muting equity performance in Europe, but it has also pulled down both Asia and Emerging Markets, despite decent performance in South Korea, Japan and India.
In many ways, AI was the topic of the month for equities. That, combined with a solid earnings season, put the Information Technology sector in front as the month’s best performing sector, climbing 8%. The only other sector in positive territory was Communication Services.
Energy was the worst performing sector, falling more than 10%. The negative performance is closely tied to the month-long sell-off in oil and the re-emergence of short speculators in that realm. Oil showed some signs of stabilising in the latter part of the month, but it wasn’t enough to avoid taking last place. Materials was the second-worst performing, due in large part to growing worries of a financial slowdown based on weak Chinese data.
Bond performance was muted but negative across the board. Those results are basically down due to uncertainty as to whether the tightening of interest rates is coming to an end or will continue, combined with a strong dollar and falling commodity prices.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
