Simplify the complex with clear and concise market insights direct from our investment experts every week.
Equity markets with Bernard Swords, Chief Investment Officer
How did equity markets perform in May?
- May was a good month for equity markets. In euro terms, world equities were up over 2%, but we must remember that performance was weak in April.
- There were a couple of drivers of this performance. Firstly, corporate results were strong. Nvidia earnings showed that companies are ramping up their investment in infrastructure to enable them to use AI tools, thus having astounding growth rates. The ‘new economy’ sectors were the leaders in May, with IT up over 6% and Communications Services up 4.1%.
- As a result of this, we are getting a narrow market again. The equal-weighted world index lagged the market cap index by over 1% in the month. The US market is also outperformed in May because it is the one with the highest exposure to the ‘new economy’ sectors.
- The other driver at play was a stronger US bond market helping the interest rate-sensitive sectors. Utilities were up nearly 5.6% and Financials were also up modestly. The losers during the month were the cyclical sectors (Materials, Industrials, Energy and Consumer Discretionary).
Fixed Income with Elizabeth Geoghegan, Head of Fixed Income Strategy
How did fixed income markets fare in May?
- Market performance in May marked a bit of a shift change with European fixed income markets underperforming compared to US fixed income markets. The benchmark US fixed income index gained almost 1% on the month, and a little less on a euro hedged basis, whereas in contrast European fixed income benchmarks were flat-to-marginally lower for the month.
- The main driver of the weaker European performance was European government bonds. The yield on the German 10-year bond rose about 0.1% over the month, whilst the yield on the US 10-year fell by an equivalent amount. Of course, the starting point matters here, and it is worth highlighting that US markets underperformed in April, but the weakness of Europe remains notable.
- Whilst US fixed income markets had a weaker start to the year following a string of better-than-expected inflation prints, it seems that European fixed income is now coming under pressure following better European macro data, which in turn is reducing rate cut bets in Europe, similar to what has happened in the US earlier this year.
- Underneath the bonnet, despite the slight divergence in the direction of travel for the two regions, the overall trends remain the same with corporate bonds continuing to outperform sovereign bonds. The rise yields has weighed slightly on corporate bonds in the last week or two but overall with continued signs of the economic backdrop remaining relatively robust, the outlook for performance remains positive.
The week ahead: what to watch out for
All eyes will be on the European Central Bank (ECB) meeting this week. Will rates be cut and what type of outlook does the ECB have for interest rate policy going forward? The main data point will be retail sales: are we getting a turnaround in the euro area economy? We have important data from the US including the jobs report (non-farm payrolls) and the Institute Supply Management Index which are the main business sentiment surveys. Is there a notable slowdown in the US? China will also release trade data which should provide an update on the health of the consumer.This is a marketing communication.
