May Commentary

GLOBAL MARKETS

Hotter inflation has fuelled fears of prolonged higher rates, driving a shift in investor sentiment.  

US MARKETS

Markets faced multiple headwinds

Despite buoyant corporate earnings, US equities faced headwinds. Real Estate, Healthcare, and Information Technology sectors led the decline. The market was impacted by disappointingly low US GDP growth, while hotter-than-expected inflation raised concerns about the Federal Reserve’s potential interest rate decisions. Strong retail sales did little to alleviate fears. Manufacturing PMIs slipped back into contraction, and US consumer confidence deteriorated in April, reaching its lowest level in over 1-1/2 years. Additionally, the US job market showed signs of cooling, with job openings falling to a three-year low.

Down  -4.2% (US 500)

UK MARKETS

Outperform global peers

Thanks to index composition, notably due to the banking, mining, and oil sectors, UK equities outpaced global counterparts. Robust performances from NatWest and others buoyed stock prices. Corporate actions, such as BHP bid for Anglo American, fuelled a 21% surge in its shares. Strong oil prices further bolstered UK equities. Concurrently, UK business activity surged, hitting its swiftest pace in nearly a year, as evidenced by the Composite PMI climbing in April. However, escalating input costs, coupled with declining output prices, hint at dwindling demand, squeezing business margins.

Up 2.1% (UK All Share)

EUROPEAN MARKETS

Declined despite improving GDP growth numbers

European equities experienced their first monthly decline in 2024.  Small and mid-caps stocks outperformed large caps, and value outperformed growth over the month.  Euro bonds also declined, but European high yield avoided negative returns.  The euro weakened against both the US dollar and sterling. Q1 GDP growth reached 0.3%, the best quarter since Q3 2022, and inflation declined. Additionally, business activity in the Eurozone surged, driven by a recovery in the services industry.

Down -2.6% (Euro 600 Index ex UK)

JAPAN MARKETS

A volatile month overall

Japanese equities were volatile during April, ultimately ending the month with negative returns. The yen faced downward pressure due to widening interest rate gaps between Japan and other developed economies, sparking investor worries about the potential impact of imported inflation on domestic demand. Inflation showed signs of easing, with the Tokyo-area Core CPI rising by 1.6% year-on-year.  Economic data indicated stabilisation in Japan’s manufacturing sector (PMI releases) and strengthened services. Hiring activity across the private sector remained positive.

Down -0.9% (Japan Index)

Key Points

•  The US dollar rose against all major currencies, with Fed rhetoric shifting to a “high for longer” narrative on ‘hot’ economic data. Geopolitical tensions and risk aversion added to USD strength, reinforcing the currency’s “safe haven” status.

•  The Japanese Yen fell against major currencies due to its low yield, especially against the US dollar. A suspected intervention by the Bank of Japan limited a further decline. The Bank of Japan's decision to maintain interest rates at 0-0.1% also put pressure on the currency.

•  Sterling strengthened against most major currencies but weakened against the US dollar. The UK faces sticky services inflation and wages growth. However, the Bank of England rhetoric still points to a near-term rate cut.

•  The euro weakened against both the US dollar and sterling, with the European Central Bank signalling the possibility of a 0.25% rate cut at its 6 June meeting.

Key Points

•  Global bond markets delivered negative performance due to rising yields and resilient inflation. Rate cut expectations have dampened, leading to market expectations of prolonged higher rates.

•  US treasuries delivered negative returns with the U.S. 10-year Treasury yield surging to 4.68%, the highest level in six months, amid persistent inflation.

•  European bond returns were negative as yields rose. Bund-10 Treasury yield gap widened to 2.1%, signalling eurozone rate cut expectations, contrasting with expectations of prolonged higher rates in the US. 

•  UK government bonds delivered negative returns as bonds yields were driven higher by resilient service inflation weighing on rate expectations.

•  Corporate and high-yield bonds outperformed government bonds, but still yielded negative returns over the month.