May global commentary: Equity markets snap two-month positive streak ending lower

Global equity markets snapped a two-month positive streak, falling in May (MSCI World -0.9% MoM) as the prospect of a US government default, forecasts for weakening economic activity in major developed markets (DMs), and disappointing economic data out of China weighed on investor sentiment. However, US mega-cap tech shares defied the generally poor investor sentiment (NYSE FANG Index +17% MoM) with double-digit gains from Amazon (+14% MoM), Tesla (+24% MoM), Alphabet (+14% MoM), Netflix (+20% MoM) and Meta (+10% MoM) adding to already impressive YTD share price gains for the US-listed, mega-cap grouping (NYSE FANG Index +61% YTD). Nvidia (+36% MoM, +159% YTD) was May’s standout performer, with management forecasting second-quarter earnings of US$11bn (50% ahead of analyst expectations), as the company which owns c. 95% of the graphics processing unit (GPU) market looks set to cash in on the hype around the Artificial Intelligence (AI) boom. Energy shares were the worst-performing DM cohort in May (S&P 500 Energy Index -10% MoM) as the oil price fell for the fifth consecutive month (-8.6% MoM) on concerns that weakening global economic activity will weigh on demand.

Emerging markets (EMs) also had a tough month (MSCI EM -1.7% MoM), weighed down by Chinese stocks (Shanghai Composite Index -6% MoM in US dollar terms). Recent Chinese economic data has underwhelmed, with all the major economic data releases in May falling short of expectations, including retail sales and industrial production, while imports fell 7.9% YoY, suggesting that the much-anticipated boom in Chinese economic activity post the lifting of COVID-19 lockdowns is proving elusive.

The US Federal Reserve (Fed) delivered a 0.25% rate hike at the start of May (as expected) and, for the first time in over a year, stopped guiding for additional hikes as it waits to see how tightening lending standards in the wake of the recent banking crisis will impact economic activity. The possibility of an impending US government default dominated financial news in May as political parties haggled to reach a compromise on raising the US borrowing limit, which they edged towards at month-end. In the lead-up to the agreement, nervous US government bond investors drove US 10-year government bond yields 0.4% higher, to above 3.8% for the first time in months, though the bonds retraced some of those losses into month-end with a deal in sight, ending the month yielding 3.6%. The US dollar ended May stronger against most currencies, as risk aversion (and higher yields) drove investors into the US currency.

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