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What's moving markets
The financial airwaves were dominated by two themes in May: the US debt ceiling negotiations and excitement over AI.
Fraught negotiations as US Secretary of the Treasury Janet Yellen’s “X” date deadline approached ultimately led to an agreement to raise the limit and make good on US financial obligations. Equity markets were largely unaffected, but short-dated Treasuries suffered, with some June expiration dates yielding over 7%.
Meanwhile, market excitement over the potential growth in generative AI led to some spectacular stock returns.
US chipmaker Nvidia enjoyed a very successful first quarter, with results well ahead of expectations, thanks to increased demand for its data centre products and a rally of $248bn to stock. This briefly took the firm’s value into the $1 trillion market cap club, alongside Apple, Microsoft, Alphabet and Amazon.
Headline US inflation slowed to 4.9% - its lowest level in two years – but it wasn’t all good news.
Both measures of the “stickier” components of inflation - core CPI (Consumer Price Index) and the core PCE (Personal Consumption Expenditure) deflator - rose by 0.4% month on month. Those increases were higher than expectations and suggest we might see further US interest rate hikes. Several members of the Fed have signalled that they’d favour a “skip” in June while they wait for more data, while asserting that this would not mean a pause. Rate hikes could resume if subsequent data doesn’t show a sufficient slowdown in prices.
In the UK’s CPI report for April, headline inflation dropped to 8.7% - down from 10.1% in March. That’s still significantly higher than market and Bank of England forecasts, so further interest rate rises in June and August are likely. Food inflation remains problematic and Prime Minister Rishi Sunak is expected to ask retailers to cap the prices of basic food items.
The Bloomberg Commodity index fell by over 5% in dollar terms, led by lower copper prices and weaker demand for oil, with barrels now selling for around $75, there’s concern that the OPEC meeting on the first weekend of June will lead to another production cut - fears heightened by an unusual media ban for reporters from Reuters, Bloomberg and The Wall Street Journal.
In Turkey, President Erdoğan prevailed in a hard-fought election run-off, disappointing investors hoping that victory for his rival would mean a return to more conventional monetary policy and closer ties to the EU.
Asset class implications
In recent months, relative performance of UK equities compared to other regions has yo-yoed. After being the strongest performer in April, they were the weakest performer in May. The FTSE All Share declined by 4.63% against a backdrop of lower commodity prices, driven by sluggish economic data from China and wider fragile sentiment.
US equities rose by 1.99% through May, but that outperformance was concentrated across big tech names, thanks to the excitement surrounding AI. In dollar terms, the Dow Jones fell by over 3% whereas the Nasdaq rose by over 7%.
Government and corporate bond markets saw yields rise again, with core inflation remaining high in the US, and reaching a new high of 6.8% in the UK. Markets are now pricing in additional interest rate hikes compared with a month ago. The FTSE Actuaries UK Conventional Gilts All Stocks index fell 3.43% during May, whereas the ICE BofA Global Broad Market Index fared better with a 0.56% decline.
Chinese equities slid sharply with signs of slowing economic growth. Property sales are down compared to pre-Covid levels, youth unemployment has breached 20%, and the manufacturing sector appears to be contracting. In contrast, Japanese equities delivered 2.83% over the month, boosted by Golden Week holiday season tourism.
Want to hear more?
Harry Garrett and Simon Molica will be discussing how the markets performed in the first half of the year with Patrick Ingram in mid-quarterly episode of Let's Talk Markets on 8 June. Book your place now ➜.
| Name | 1m | 3m | YTD | 1yr | 3yr |
|---|---|---|---|---|---|
| FTSE Actuaries UK Conventional Gilts All Stocks TR in GB | -3.43 | -2.32 | -26.19 | -15.67 | -30.80 |
| ICE BofA Global Broad Market Hedge GBP TR in GB | -0.56 | -0.62 | -7.77 | -3.06 | -15.30 |
| IA UK Direct Property TR in GB | 0.21 | 0.85 | -4.70 | -8.86 | 2.66 |
| FTSE All Share TR in GB | -4.63 | -4.23 | 1.94 | 0.44 | 33.90 |
| FTSE USA TR in GB | 1.99 | 3.07 | -3.76 | 4.16 | 33.90 |
| FTSE World Europe ex UK GTR in GB | -3.96 | -0.87 | -0.75 | 8.52 | 35.41 |
| FTSE Japan TR in GB | 2.83 | 3.44 | -0.65 | 6.34 | 12.57 |
| FTSE Asia Pacific ex Japan TR in GB | -0.78 | -3.52 | -9.07 | -6.06 | 15.96 |
| FTSE Emerging TR in GB | -0.95 | -3.16 | -10.01 | -6.72 | 12.86 |
Source: FE Analytics, GBP total return (%) to last month end
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Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.