There is an old saying, ‘ne'er cast a clout till May be out’, which basically means don’t cast your winter clothes until summer has arrived… Well, summer still seems far away, particularly if you live in the UK, and more broadly in financial markets, we don’t appear to be anywhere nearer to normality, whatever that is.
Central bank inflation positioning remains increasingly confusing. Officials yet again proved exceptionally good at saying one thing one day and then the polar opposite the next. This ambiguity in their stance has significant implications for the financial markets and is creating uncertainty and volatility.
Fed positioning has been crucial to European rate positioning. However, with the Fed appearing to be pulling back from making any firm decision either way, we can see a stalemate through the middle of this year. The Fed's higher-for-longer positioning, which is the current beat, sees the central bank determined not to lower rates too soon. Various Fed officials are even open to raising rates if required.
The most recent US inflation figure came in at 2.7%, which is above the targeted 2%. This higher-than-expected inflation, coupled with the fact that parts of the economy are still running quite hot, has significant implications for the financial markets.
The Fed now wants to see more data before acting either way. The three cuts mooted earlier this year are way off the current thinking, with traders pricing in one before the November presidential election. Goldman Sachs has even said that no rate cuts could be on the cards for this year, further adding to the market's uncertainty.
This has created a quandary for European policymakers, who appeared to have an opportunity to take a divergent path, as Lagarde indicated. However, given their continued laser focus on the Fed, it remains unlikely that they will. Indeed, the most recent inflation numbers, which rose to 2.6% in May, did not help their situation.
Moving on from Fed inaction, encouragingly, we are seeing an uptick in capital market confidence, with more IPOs on the cards. Many of these have been on hold for a year or two, and London is certainly making a push on this front.
Politics also played a role in May, with US presidential candidate Donald Trump found guilty of paying hush money… what this means remains very unclear. While in the UK, Prime Minister Rish Sunak called an election for 4 July, which he looks highly unlikely to win. The turmoil from these events may not have impacted the past month but will likely cause excitement later in the year.
In this confusing environment, the Vix overlooked the higher-for-long mentality, with the volatility index falling 14% month-on-month to close at 12.9.
US equities hit new highs mid-month - there was much relief as Nvidia's Q1 results came in above expectations, with its shares surging on earnings and closing the month up 32%. This news lifted markets, with the S&P 500 ending May up 4.8%, only trumped by the Nasdaq's 6.9%. Europe was less excitable, but the Dax rose 3.2% and the FTSE 100 1.6%. In Asia, the Nikkei 225 was marginally positive, up 0.2%, and the Shanghai Composite Index dropped 0.6%.
With concerns about interest rates, uncertain market data and weak oil demand, oil markets fell at the start of the month and headed downwards through much of the month, with WTI falling 5.9% and Brent 7.1%. The most significant move in metals was silver, which closed the month up 14.5%, while gold was more subdued, up 1.3%. There were also sharp moves in nickel, driven largely by riots in New Caledonia, while tin was bolstered by the increased demand for semiconductors and technology, particularly AI (and Nvidia's rise).
Crypto also had a good month, with Bitcoin rising 13.2%. Policymakers' more favourable stance on crypto is definitely feeding through to the market with more institutional interest.