Chinese lockdowns, a 50bps Fed rate hike and the ongoing war in
Ukraine made for another interesting month in the markets in May.
Rollercoaster: US stock markets closed out the month of May
broadly unchanged, but not without significant volatility along the way. The Dow and the
S&P 500 were little changed, while the Nasdaq lost about 2.1% on the month. The
S&P 500 traded in a range of 500pts, flirting with bear market territory at one stage.
In equities, the Musk-Twitter saga dragged on, whilst the market was dealt a blow by the
likes of Wal-Mart and Target.
European indices fared better, though with similar levels of
volatility evidenced by sharp declines at the start of the month followed by a strong
recovery in the second half. The FTSE 100 advanced almost 1% and to take its YTD gain to
3%. Asian markets firmed a touch through May with Japan then extending gains at the start
of June as the yen weakened to a 20-year low.
Inflation pressures showed no sign of abating. Figures out in May
showed US inflation rose to a fresh four-decade peak of 8.3%. In the UK, CPI hit 9% in
April, the highest in 40 years, and was up a huge +2.5% month-on-month. RPI rose by 11.1%,
also a four-decade high. Producer price inflation rose to 14% on the year to April 2022,
up from 11.9% in March 2022. And the pipeline does not suggest pressures are about to
ease, with the price of materials and fuels used by manufacturers remained at a record
high of 18.6% in the year to April 2022. Figures for the Eurozone are expected to show a
rise of 8.1% for May, a record high for the bloc.
Bond yields peaked at the start of the month as the Federal
Reserve raised interest rates again, with the US 10yr Treasury moving to within a few bps
of the 2018 peak, which was the highest since 2011. The Fed raised rates by 50bps, as was
widely expected. But it allayed many fears about a more aggressive hiking cycle, with
chair Jay Powell saying larger hikes were not discussed. It was the first 50bps hike in 22
years and underscored just how urgent the Fed feels the inflation situation has become.
Following the move yields proceeded to move sideways as the market digested the inflation
data and comments from leading central bankers. By the beginning of June, the 10-year
Treasury yield was back above 3%.
On the FX front, the pound erased losses early the month to
finish broadly flat, whilst the euro gained ground against the dollar as the market became
more confident the European Central Bank would begin raising interest rates in July. The
yen rallied but by early June it was at a 20-year low against the dollar as the carry
trade revived on simple interest rate differentials due to the Federal Reserve hiking
rates and the Bank of Japan sticking to its yield curve defence. Crypto markets were
broadly weaker as the major tokens resumed their decline from April.
In commodities, gold declined but finished the month off the
lows. Crude oil continued to gain ground on tightening supply despite lockdowns in China
curtailing demand. Natural gas surged above $9 to record its highest since 2008. Wheat
spiked on an Indian export ban as the war in Ukraine drags on, with investors worried that
mooted grain corridors out of the country may not happen. Cotton also surged, hitting a
fresh multi-year high before retreating sharply.
