May saw further unwelcome volatility in most stock markets. Reassuringly, inter-month losses were typically recovered by month-end, with a number making some modest progress. The FTSE 100 was again one of the leaders globally, as its oil and banking sectors pushed the market higher.
Reality Bites
War of attrition in Ukraine continues with Russia focused on securing the Donbas.
Finland and Sweden apply to join NATO.
EU ban to hit about 75% of Russian oil imports.
UK CPI inflation hits 40-year high of 9% and forecast to go over 10%.
EU slashes economic growth outlook and raises inflation expectations, driving bond yields higher.
Profit warnings from major US retailers raise concerns about health of consumer.
US CPI inflation hits 8.3%.
Jerome Powell confirmed as Chair of Federal Reserve (Fed) for second term.
Fed sticks to 0.5% interest rate hike guidance, but jobs data remains strong.
China rolls out broad package of support measures.
Lockdown in Shanghai and Beijing being eased.
OPEC+ to raise output again from July.
The economic outlook appears to becoming more uncertain and investors have, at times, been shunning both risk assets and bonds. Inflationary pressures are still generally worsening. As a result, central bankers look set to tighten the screw further in the coming months, potentially materially, and in so doing, will exert substantial challenges on economies.
Fixed interest markets have been a focal point, with movements in Europe starting to provoke concern. Eyebrow raising moves have been seen in European government bond markets, particularly in Italy, which has seen its benchmark bond yield rise from around 1% at the start of the year, to over 3% at the start of June, and up to 4% at the time of writing. At the very least, they suggest that the Euro could come under pressure, as it remains uncertain how the ECB can both tighten policy and ‘do whatever it takes’ to keep peripheral bond yields under control. The 10-year Gilt climbed through 2%, on concerns over the outlook for the UK economy and its vulnerability to the inflationary backdrop. In contrast, the benchmark 10-year US Treasury yield finished the month largely unchanged having reacted sharply in earlier months.
Against these market moves, China’s ‘zero tolerance’ Covid policy continues to be a global exception. Authorities have recently gradually wound back its lock down measures in Shanghai and Beijing. This, in part, contributed to a noticeable rally in the oil market, which saw Brent oil breakout of its recent trading range to breach $120 per barrel. Whilst OPEC pledged further increases in output, the market remained focussed on the possibility of excess demand in the months ahead.
The UK would appear to be entering a summer of discontent, politically and economically, as the cost-of-living crisis bites in earnest amidst an increasingly tumultuous political backdrop. The start of June has seen the Prime Minister face a confidence vote, and whilst basking in a stay of execution, the margin of victory would suggest that his days are numbered. The worry being that the Government focuses on saving the Prime Minister rather than addressing the significant challenges that the country faces with a considered policy response.
Against this backdrop, a number of consumer sentiment indicators have deteriorated further in both the US and UK, increasingly pointing to the likelihood of recessionary conditions, as consumers reduce spending given the challenges they face. Results from the US suggest that many retailers have been caught out by demand being much less than expected, and as such, they have been left with excess inventories which they will need to discount. Elsewhere in the US, there are signs of growing challenges in the housing market, with a notable rise in mortgage rates and a cooling in new build construction. In turn, the price of timber, a key input for US homebuilders, is rapidly falling back to $500, having neared $1,500 in March. These dynamics are a reminder that the inflationary pressures will reverse as markets adjust.
The coming months could be thought-provoking, given that markets need to consider more aggressive action from central banks, in light of recent inflation data. In spite of the strong employment backdrop, consumer sentiment appears to be turning notably weaker, posing a further challenge to the global growth outlook, and raising the likelihood of recession. Whilst heightened levels of risk aversion can be a challenge for those who dislike volatility, it also provides opportunities to those who are taking a long-term stance – we remain calm and retain a sense of perspective.
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