Monthly Market Roundup cov. May 2023

European markets ended May down, as uncertainty around the US debt ceiling set in. Weak economic data, pointing to a global slowdown also weighed.

Though inflation fell to its lowest level since February 2022 in May (down 0.9%), it wasn’t enough to surpass more negative news. The drop in inflation beat consensus estimates, and core inflation (excluding food and fuel) also fell by 0.3%.

In politics, the Spanish prime minister called a snap general election, following a poor showing for the Socialist party (PSOE) in the local and regional elections. The opposition, Partido Popular (PP) made gains. It’s believed will form a coalition with Vox (another political party) after the general election.

In the UK, equity markets also fell, primarily because core inflation hit a 31-year high. This heightened expectations that there’ll be more monetary policy tightening (raising of interest rates) from the Bank of England (BoE).

The BoE had already hiked interest rates to their highest level since 2008 at 4.5%. The bank warned that inflation was unlikely to reach the target level of 2% until early 2025.

UK GDP grew marginally in the first quarter of 2023. The BoE revised its prediction of a recession, now believing that the economy will be stagnate in the first half of the year, with growth accelerating in the second half.

There were mixed fortunes in the US in May. While the NASDAQ and S&P500 indexes ended up, the Dow Jones ended down as big losses for the likes of Nike and Walt Disney dragged.

The US debt ceiling dominated headlines over the month. Ultimately, the House of Representatives voted to raise it, which should help the country avoid a default. The bill will still need to be passed by the President and the senate but the vote in the house was seen as step in the right direction.

US inflation fell to its lowest level since April 2021, with core inflation also down slightly. This raised hopes that the Federal Reserve’s interest rate hiking cycle may soon be coming to an end, which also gave markets a boost. 

Asian equities fell across the month, weighed by uncertainty off the back of the US debt ceiling and concerns over China’s economic recovery. Performance varied between individual countries though, with some faring better than others.

Buoyed by global excitement over the potential of artificial intelligence (AI), the tech-heavy markets of Korea and Taiwan posted positive gains. Tech stocks also boosted overall performance in Indian markets, where all sector gained, apart from utilities.

In China, there were signs of growth moderating, as economic data came in lower than expected. Reports of new Covid-19 infections compounded domestic uncertainties.

Emerging market equities declined in May, with concerns around the US debt ceiling and China’s economic recovery impacting performance. All regions ended on negative ground, Central & Eastern Europe, Middle East and Africa (CEEMEA) lagging most.

Underperformance in CEEMEA was driven by Saudi Arabia, United Arab Emirates and South Africa. Sentiment dampened against the latter as reports emerged that it had allegedly sold arms to Russia. 

In Latin America, only Brazil made gains as its unemployment rate fell to the lowest level in seven years. Meanwhile, Asian equities were held back by weakness in China – with disappointing economic data from April and signs of economic growth moderating.

Overall, fixed income markets ended the month down, though there were gains in some areas, like Continental Europe. UK gilts lost the most ground, followed by US treasuries. German bunds saw marginal gains.

Disappointing annual inflation data, which was higher than consensus estimates, was the main reason for UK gilts’ underperformance. The Bank of England had already sanctioned a 0.25% increase in interest rates, with more expected this year.

Investment grade bond also struggled in May, given their sensitivity to interest rate movements. Both the US and Sterling corporate indexes lost ground. It was a mixed picture for high-yield bonds. The US index fell, while the euro currency saw marginal gains.