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Market Update May 2023

Nvidia leads US technology recovery on AI hopes.

  • Progress made on increasing current US debt ceiling to avoid US government default.

  • US Technology stocks outperform, led by Nvidia.

  • Global inflation pressures continue to ease although UK core inflation remains high, with food prices 19.3% higher in the year to April.

  • Japanese equities reach highest level for over three decades. German DAX index reaches new all-time high during month.

  • The US Federal Reserve, Bank of England and European Central Bank all raise rates by a quarter of a percentage point.

  • US jobs market remains strong with manufacturing and housing conditions starting to improve. Despite this, Federal Reserve hint at interest rate pause in June.

  • Germany’s revised negative Q1 GDP puts the country into technical recession, following its contraction in Q4 2022.

  • Facebook owner Meta, suffered a record fine from European regulators of $1.3 billion for sending user information to the U.S.

  • The Federal Deposit Insurance Corporation (FDIC) seizes control of First Republic Bank, in the second-largest bank failure in US history.

  • Recep Tayyip Erdoğan wins Turkish presidential election, extending his two decades in power.

  • King Charles III and Queen Camilla are crowned in a ceremony at Westminster Abbey.

Global equity markets overall were relatively calm during May, with the MSCI World Equity Index up 0.4%, but this disguised some large relative moves below the surface. The technology heavy NasdaQ index rose 9.9%, led by Nvidia, which rose close to 40% during the month and briefly became the first microchip stock with a $1 trillion market value. Its shares surged on expected AI chip demand. In contrast, another US equity Index, the Dow Jones Industrial Average Index, which has a much smaller weighting to the large technology stocks that have been driving equities so far this year, fell 1.9%.

There was also a large dispersion in equity returns across regions. Japanese equities were relatively strong, boosted by strong inflows from foreign investors. The benchmark Nikkei 225 Index reached its highest close since August 1990 and ended the month up 7% in local currency terms. The German DAX Index hit a record high during May, although it fell back later in the month. Chinese equities were relatively weak, as its economic recovery continues to falter. The MSCI China Index ended the month down 7.1%. UK equities were also weak, with the FTSE 100 down close to 5%. Its overweight to the energy and financial sectors and underweight to technology, proved to be a headwind.

Bond yields generally moved higher during the month as investors remained concerned about whether the US can agree a new debt ceiling so that it can avoid a default on their government debt, although towards the end of the month some progress had been made on this front with the US House of Representatives voting in favour of a bill to suspend the debt ceiling. This caused the yield on the nearest dated Treasuries to fall sharply, after exceeding 7% at one point.

With new US data showing continued strength in the labour market and sticky inflation, pressure remains on the US Federal Reserve (Fed) to continue hiking rates to try and slow the economy and inflation. Fed officials agreed unanimously to lift rates by 0.25% in May but hinted that they may pause in their June meeting. The Fed tightening cycle has come a long way in just over a year with interest rates having risen 5%, the Fed has shed $400bn in assets and, more recently, a string of bank failures has started to constrict credit. It does feel like the time is right for a pause in US interest rate rises before focus turns back to the Bank of England and the European Central Bank.

In the UK, government bond yields jumped higher, following news that core inflation jumped to 6.8% in April. The yield on 10-year UK Government bonds increased from 3.7% to 4.2% during the month. The Bank of England also increased their key bank rate by 0.25% during May, with a 7-2 vote in favour of the rise, taking interest rates to their highest level (4.5%) since 2008 and provided the biggest upward revision to GDP in its history as it now expects the UK to avoid a recession. The Bank set out its expectation that by mid-2026, GDP will be 2.25% higher that it had predicted back in February. The Bank also warned that inflation would take longer to hit its 2% target, instead it expected 4th quarter inflation to be 5.1% (instead of previous 3.9% guide) and would not be at 2% until the start of 2025. This is quite a change and was focused on stubborn food inflation.

Elsewhere, commodities were generally weak on concerns over slowing demand in China as well as a stronger US dollar. The price of a barrel of WTI Crude Oil fell close to 8% with some commentators speculating that Russia hasn’t followed through fully on pledges to cut output that it made in response to Western sanctions.

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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.

It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.

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