There were so many red flags out in May that it was difficult to know which way to turn. Stagflation is clearly the chief concern, with disappointing growth figures and fast rising inflation, a truly toxic mix. In this environment, markets bounced around and there were stark warnings of an imminent global economic recession. These are unsettled, nervy times, with the S&P 500 closing at one point on official bear market territory then bouncing back to finish the month flat.
…what we are currently seeing is unchecked, out-of-control, inflation.
Life is getting ever more expensive and uncertain. There is no getting away from inflation. You see this in food, utilities, travel… it is all around us. It has taken a while for central banks to admit to the scale of the problem – and they are certainly not on top of it – but with UK inflation hitting a 40-year high of 9%, Spain 8.7%, US 8.5% and Germany closing in on a 40 year high of 8%, there is nowhere to hide. If Western central bankers want to feel a little better, they can look at Venezuela, where inflation sits at around 2,000% and Sudan 340%.
Central banks have been keen to talk-up temporary inflation and this may well be the case, but what we are currently seeing is unchecked, out-of-control, inflation. Just look at oil, which has ticked back up to $120 a barrel. Life is not getting cheaper anytime soon.
In response, the Fed has moved harder and faster than most other Western central banks, raising rates by a half point in May. This was the biggest increase since 2000, with Fed Chair Jerome Powell saying that he will continue to do so until he has clear evidence that inflation is falling. Currently it looks as if there are two big interest rate rises to come in June and July, with Atlanta Fed President Raphael Bostic commenting that “a pause in September might make sense.” This type of comment and the slightly less hawkish tone in the Fed minutes towards the end of the month saw markets jump.
Bank of England governor Andrew Bailey has been under attack on multiple fronts, widely accused of missing the bus on this one that he in turn blames on being a “bad situation.” Given the bank’s mandate includes maintaining financial stability, the team here are not convinced that Bailey’s comments about “apocalyptic” food prices are in line and helpful with that brief.
…with rates still exceptionally low across the board, the gap between rates and inflation is still a chasm and action too slow
The UK has certainly been slow to act, but so have other Western powers, and the ECB looks to be finally getting into line in July when it is looking to raise rates from negative to 0% by the end of September, that is if one is to believe Christine Lagarde. But with rates still exceptionally low across the board, the gap between rates and inflation is still a chasm and action too slow, a view backed by the likes of Alan Howard and Bill Ackman who have publicly said that more aggressive tightening is required by all central banks. What we are seeing all seems too late and too little, although a material rates shock may well also tip global economies over the edge. It is a delicate balance and I am delighted to not be a central banker making that call.
Throughout the month there was a great deal of rumour and counter rumour coming from Russia and Russian watchers. This particularly focused on the 9 May Victory Day, which was expected to see big proclamations and pronouncements on Ukraine, but ultimately came to little. Yet markets were in such a state of nervousness that the VIX hit the month’s high that day, just shy of 35.
Big pronouncements of solidarity with Ukraine and a willingness to arm and back the Ukrainians appear to be slowing down.
Not surprisingly, Russia has been central to many of the month’s headlines as it continues to attack Ukraine and unfortunately, according to reports, they do appear to be making some headway in the east of the country. Yet Europe’s policy to Ukraine appears to be heading down the cul-de-sac of procrastination and appeasement, notably Germany. Big pronouncements of solidarity with Ukraine and a willingness to arm and back the Ukrainians appear to be slowing down.
There has been much Western head scratching over China’s slowdown, which has been playing havoc globally as supply chains and growth grind to a halt. While the rest of the world is out of Covid lockdowns (excluding North Korea), China authorities have been doubling down on their ‘dynamic’ zero Covid policy. The result has shut down large swathes of the economy, negatively impacting retail sales and industrial production. To sweeten this, China introduced new looser monetary policy and fiscal stimulus, including extensive tax cuts, rebates and emergency infrastructure spending in ailing sectors. But there are real questions as to whether they have the required impact and while we are the first to admit that we are not China experts, what we do know is if there is one country that can stimulate its economy it is China.
Equity markets smelt fear this month yet still bounced back from lows. Weak economic data, poor market outlooks and disappointing results all weighed on sectors. Volatility was impressive during the month, with 9 May the worst day for global stocks since June 2020 as the Nasdaq slumped almost 5%. Throughout the month the VIX remained well above its historical average.
…May had it all - capitulation trades, relief rallies, you name it, they happened this month.
May had it all, capitulation trades, relief rallies, you name it, they happened this month. The month was saved by the rebound on 25 May, as US retailers released decent numbers and Broadcom Inc’s $61 billion acquisition of VMware Inc. By the end of that week, the S&P 500 had its best weekly gain since November 2020 and by the end of the month, having flirted with bear market territory, the index was flat and the Nasdaq only down 2%. In other markets, the Dax was up 2%, the FTSE 100 up 0.8% and the Nikkei up 1.6%
The reality of rising rates has hit growth stocks hard, largely the concerns over future cash flows, and most are back to 2020 territory. This was the month that Apple lost its crown as the world’s most valuable company, which it handed to Saudi Aramco with a market cap of $2.43 trillion. The end of month snapback saved some blushes, with Tesla closing the month down 16%, having at one point been down around 30%. ARK Innovation ETF, which is seen as a growth stock proxy, was at one point down around 23% for the month but closed the month around 4% down.
Commodities in May were largely about energy prices and agriculture supplies, while metals were rather more muted as China remained on the sidelines in lockdown.
There was much talk about the EU banning Russian oil that saw Brent prices move back above $120 a barrel. But it is certainly not a unified approach, with Hungary agitating against this. While Ursula von der Leyen sought a “complete ban on all Russian oil, seaborne and pipeline, crude and refined,” the result was somewhat watered down as the EU did finally agree to ban more than two thirds of Russian imports.
Saudi Arabia reaffirmed that Russia is part of the Opec+ Club and while Russia is being ostracised by the West it appears to be embraced by the rest
From all the data and what we read in the trades, there is clearly still a huge amount of Russian oil in circulation. There are different prices globally for Russian oil but the taps are firmly on. Furthermore, Saudi Arabia reaffirmed that Russia is part of the Opec+ Club and while Russia is being ostracised by the West it appears to be embraced by the rest. What is a concern is the level of US distillate reserves, which are at 20 years lows providing little in the way of back up, according to Energy Information Administration data. Towards the end of the month, the G7 energy ministers were calling ‘oil and gas producing countries to act in a responsible manner and respond to tightening international markets… Opec has a role to play.’ In our eyes it all sounds a touch desperate on the part of the West.
Famine is a real concern, not in Ukraine but around the world as prices rise. Already this year wheat prices are up 60%. With the breadbasket of Europe largely paralysed by war and blockades, traditional markets just cannot be supplied. Recent satellite analysis from Kayrros (using April data) also shows the level of disruption to this year’s harvest, with Ukraine estimated to produce 21 million tonnes of wheat – 12 million tonnes less than last year. This is a massive shortfall as Ukraine is the sixth biggest exporter of wheat in the world, which will have an impact on world food markets. In addition, there is a global fertilizer shortage, with both Russia and Ukraine responsible for 28% of nitrogen and phosphorous fertilizer. This situation is unlikely to be resolved anytime soon, with Russia saying it is only willing to open-up shipping routes if the West cuts sanctions.
The USD lost some of its lustre this month as the EUR strengthened. There had been talk at the start of the month of EUR USD parity for the first time in 20 years, but this soon fell away. This was largely underpinned by increased hawkishness from ECB rate setters, with expectations of 100bps of tightening by year-end, and the weakening greenback.
There are questions hanging over the crypto market and a distinct lack of confidence.
Crypto had a month to forget. When markets are bullish and growth stocks flying, crypto has tended to follow the space or lead. But the crypto market has fallen to around $1.3 trillion from $3 trillion. The 12 May was a day the sector will not forget in a hurry, with news that Tether’s USD peg had failed. This saw Terra Luna fall from $118 in April to zero and the entire sector took a huge dive. Bitcoin fell 16% in May and is now down around 50% from its absolute peak; Ether fell even further, down 29%, in the month and is now down 55%from its peak. It was not just the digital currencies that were impacted, with the Coinbase crypto platform now down 69% for the year and 36% for the month.