Overall Market Summary:
Global shares fell in May in US dollar terms, with notable sector differences. Enthusiasm for artificial intelligence boosted technology stocks, while survey data indicated further weakness in manufacturing, although services remained robust. Concerns over the US debt ceiling dominated headlines, but a deal was reached shortly after month-end. Government bond yields rose (indicating falling prices).
United States:
US equities had mixed performance in May, with varied sector returns. Economic data remained supportive, but fears of a government default made investors jittery. The Federal Reserve raised rates by 25 basis points, as expected.
The labor market remained tight, with the unemployment rate falling to 3.4% from 3.5% in March. Inflation, measured by the consumer price index (CPI), rose 0.4% month-on-month in April, after a 0.1% increase in March. Core CPI, excluding food and energy, also saw a 0.4% rise.
Industrial activity improved slightly in May, according to initial composite purchasing managers' index (PMI) data. The PMI indices are based on survey data from manufacturing and services companies; a reading above 50 indicates expansion.
The Fed's rate hike was anticipated, but there was a notable adjustment in messaging, indicating uncertainty about future policy tightening and the need for flexibility.
Debt ceiling discussions dominated the month. A compromise was reached on the final weekend of May to raise the borrowing limit, pending Congressional approval.
Europe:
Eurozone shares weakened in May after a generally positive year. The MSCI EMU index returned -2.5%. All sectors fell except information technology, boosted by semiconductor stocks following strong sales projections from US peers.
Revised figures showed that Germany's economy did not escape recession over the winter, with GDP declining by -0.5% in Q4 2022 and -0.3% in Q1 2023.
More recent data pointed to slowing momentum in Q2. The flash eurozone composite PMI fell to 53.3 in May from 54.1 in April, indicating growth but at a slower pace amid manufacturing sector weakness.
Euro area annual inflation was 7.0% in April 2023, up from 6.9% in March. The European Central Bank raised key interest rates by 0.25%.
Encouraging signs of easing price pressures emerged in May. Germany and France reported lower inflation rates, raising hopes that eurozone rate hikes may soon end.
United Kingdom:
UK equities fell in May, with large diversified energy and basic materials groups among the biggest losers due to broad-based commodity price weakness. Technology was the only sector with positive returns, while financials also fared relatively well.
The Bank of England announced its 12th consecutive base rate rise, hiking by 25 basis points from 4.25% to 4.5%. The bank also revised its growth and inflation forecasts upward. The Office for National Statistics confirmed 0.1% GDP growth in Q1 2023, supporting views that the UK might avoid a recession this year.
Consumer price inflation slowed less than expected to 8.7% in April from 10.1% in March. Core inflation rose to 6.8%, the highest since 1992, prompting expectations of further rate hikes by the Bank of England to tame inflation.
Japan:
The Japanese stock market continued its strong momentum in May, with the TOPIX Total Return index rising by 3.6% in local terms. The yen weakened further against the US dollar, reaching the 140 yen level.
Foreign investors continued to purchase Japanese stocks, driven by large cap growth. Positive sentiment towards the semiconductor industry also supported the market, pushing the Nikkei 225 above 31,000 yen, its highest in 33 years.
Full-year earnings results were solid, with many companies announcing increased shareholder returns. This, combined with the Tokyo Stock Exchange's initiatives, boosted stock prices for companies with low valuations.
Japan's macroeconomic trends showed positive Q1 GDP growth, driven by domestic demand and inbound tourism recovery. Visitors to Japan reached 70% of pre-Covid levels, with tourist spending also back to pre-Covid levels.
Asia (excluding Japan):
Asia ex Japan equities recorded a negative performance in May, with sharp declines in Hong Kong and China offsetting gains in South Korea, Taiwan, and India.
Hong Kong and China were the weakest markets due to fading investor optimism after China's economic reopening. Disappointing economic data and weakening demand contributed to the decline. China's factory activity fell below growth levels, and service sector activity expanded at its slowest pace in four months.
Taiwan was the best-performing market, driven by technology stocks and AI-related shares. South Korea also saw gains, supported by the AI theme. India achieved modest gains, bolstered by positive economic data.
Emerging Markets:
Emerging market (EM) equities underperformed the MSCI World Index in May. South Africa was the weakest market, with a double-digit loss in US dollars due to allegations of arms sales to Russia, worsening electricity issues, and the rand's decline.
The Czech Republic also underperformed amid consumption pressures. China showed signs of moderating recovery, with retail sales and industrial production contracting in April.
Kuwait, UAE, and Saudi Arabia underperformed due to weakening oil prices. Colombia, Peru, and Chile lagged, with Colombia facing political uncertainty and concerns about reclassification to frontier market status.
Brazil and Qatar posted small gains and outperformed, as did India despite the rupee's depreciation. Hungary gained on positive sentiment regarding interest rate cuts. Taiwan and Korea outperformed, led by technology shares and AI optimism.
Greece was the top-performing market in May, as the ruling New Democracy party's strong election results eased coalition fears. Another round of voting is scheduled for June 25.
Global Bonds:
Government bond yields generally rose in May, with divergence between markets. Weaker data in the eurozone led to market outperformance. The US Federal Reserve announced its 10th interest rate hike, raising the Fed funds rate to a target range of 5% to 5.25%. The Bank of England and European Central Bank also raised rates by 0.25%.
The US 10-year yield increased from 3.42% to 3.63%, with the two-year rising from 4.01% to 4.40%. Germany's 10-year yield decreased slightly from 2.31% to 2.27%. The UK's 10-year yield saw the largest increase, rising from 3.72% to 4.18%, with the two-year yield increasing from 3.78% to 4.34%.
Global growth concerns re-emerged, with weak manufacturing activity across major economies, particularly in the eurozone. Service sectors showed continued resilience, prompting a hawkish response from Fed members. A US debt ceiling deal assuaged market concerns and dampened volatility.
The UK bond market underperformed the US and Europe due to higher-than-expected inflation. Positive eurozone inflation data at month-end supported the market.
Credit market performance was mixed, with US markets underperforming Europe in both investment grade and high yield. European high yield performed well, with positive total returns and excess returns over government bonds, while US total returns were negative.
The US dollar performed well against all G10 currencies amid a weakening global backdrop. The Swedish krona notably underperformed due to weak activity data.