Equity markets: volatile stock markets virtually unchanged in May
Sharp price swings were the hallmark of the past month, upward and downward. In May, the S&P experienced the steepest daily decline (-4%) in nearly two years. It briefly put the U.S. stock market into ‘bear market’ territory (down 20% since the recent high in dollars). The other stock markets followed a similar course. In addition to the inflation and interest rate fears already present, the cause of the negative sentiment lay in the disappointing prospects announced by retailers Target and Walmart in the U.S. following the publication of their quarterly results. The companies were concerned about their profit margins due to rising costs (labor, transportation, etc.) and difficulties in the supply chains. Investors saw this as a signal that corporate earnings, in addition to higher interest rates, could also create a headwind in equity markets in the coming months.
Towards the end of the month, stock markets were able to recover to remain virtually stable over the month. Other retailers confirmed better prospects in their quarterly results, while the belief is gaining ground that inflation reached its peak. Robust economic data in the U.S. and the easing of lockdown measures in China also supported the market. Also, the Chinese stock market (CSI300) stabilized after several weaker months.
In the first part of the month, value stocks outperformed growth stocks in the U.S. and Europe. However, at the end of the month, growth stocks regained the upper hand thanks to the stabilizing interest rate trend and the generally better market sentiment.
|MSCI EMU NR||0.6%||-2.1%||-10.4%||-4.1%|
|MSCI EUROPE NR||-0.8%||-0.5%||-6.6%||3.0%|
|MSCI USA NR||-1.8%||-1.6%||-8.9%||11.1%|
|MSCI JAPAN NR||0.1%||-3.3%||-8.1%||-1.1%|
|MSCI EM. MARKETS NR||-1.1%||-2.8%||-6.3%||-8.5%|
|MSCI AC WORLD NR||-1.4%||-1.3%||-7.5%||6.4%|
Bond markets: stabilization, but diverging interest rate trend in May
After the sharp upward movement of the previous months, the trend of bond yields stabilized in May. There was some relaxation, especially in the United States, where the 10-year yield peaked at 3.15% but then fell back to 2.84%. In Europe, on the other hand, German 10-year yields remained close to their recent high of around 1.1%. In the U.S., although real interest rates rose above 0% in early May for the first time since the pandemic, they subsequently stabilized. The other component of nominal interest rates, implied inflation expectations, even went a little lower. The decline in implied inflation expectations for the German interest rate was more than offset by the continued rise in real interest rates. It reflects the shift in market expectations about how drastically central banks will act in both regions. After the jump during April, interest rate spreads against Germany of other eurozone government bonds moved even marginally higher.
Corporate bond spreads continued to widen in May, reflecting (the prospect of) a more challenging economic environment and a tighter monetary environment.
Central banks: ECB in the picture
In early May, the Federal Reserve announced, as widely expected, an interest rate hike of 50 basis points and an official beginning of the deleveraging of its balance sheet starting in June. Additional interest rate hikes of 50 basis points at the next FOMC meetings lie ahead, but voices call for a pause in the interest rate cycle later this year.
A first interest rate hike by the European Central Bank in July appears to be a certainty. President Christine Lagarde even suggested that the ECB end negative interest rates in September. Several ECB officials have expressed concern that the euro's weakness would undermine the ECB's price stability objective. A faster pace than 25 basis point increases does not seem a likely scenario for now, even though some ECB members have suggested raising rates by 50 basis points.
China slightly lowered the 'prime rate' for 5-year financing. This rate cut intends to give individuals the opportunity to take out a mortgage at a lower interest rate. However, a reduction in the policy rate has not yet materialized. The increasing differential with U.S. interest rates that this would create and the capital flows this would trigger may explain the reluctance.
|Fed funds||0.75-1.0%||+0.50%||May 2022|
|ECB deposit rate||-0.5%||-0.1%||Dec. 2021|
Currencies: euro recovers
After the weakness that set in in February, the euro regained some ground against most other currencies. Against the dollar, the euro strengthened by 1.8%, reducing the loss since the beginning of the year to 5.6%. On the one hand, the reasons are the changing dynamics in monetary policy expectations in both regions, where in the Eurozone, market expectations for interest rate hikes increased. At the same time, in the U.S., they remained stable. On the other hand, there was the improved market sentiment in the equity markets, which meant less support for the 'safe' dollar, especially in the latter part of the month.
The Norwegian krone weakened against the euro, despite rising oil prices. Although the central bank left interest rates unchanged in early May as expected, it is likely to continue its quarterly rhythm of rate hikes in June. Market expectations had previously evolved to a faster rhythm of interest rate hikes.
The Chinese currency weakened some more against the dollar but could limit losses due to the improving covid situation. The currencies of emerging markets also stabilized, except for the Turkish Lira, which continued its decline. In April, inflation reached 70%, while there will be no interest rate hikes for the time being.
Commodities: oil price nears the highest level
The Brent oil price closed above 120 dollars per barrel in May. This evolution puts the price near its recent high of early March at 128 dollars. The historical highest level in 2008 is at 146 dollars. OPEC+ sticks to its plan to increase production by about 400,000 barrels a month, a target that has been in place since last year. The group's reluctance to increase oil production faster, despite geopolitical developments, is driving prices higher. At the European summit at the end of the month, the EU was able to agree on an embargo on most Russian oil. Exceptions are highly dependent countries that cannot quickly find alternatives, such as Hungary, Slovakia and the Czech Republic. The market also reacted to this with (limited) higher prices.
Industrial metals declined in May (-6.2% for the GSCI Industrial Metals). The decline occurred mainly in the first half of the month, continuing the trend of April. After that, prices stabilized as lockdowns in China could ease somewhat.
In May, the gold price hovered around 1,850 dollars per ounce but closed lower on balance. The stabilization of bond yields (nominal and real) took some pressure off the precious metal price, while the weaker dollar provided additional support.