By Haith Nori
May has been an extremely volatile month. There seems to be no short-term resolution to the Ukraine crisis and therefore it can still have unpredictable effects on global markets. For example, India has made a move to halt wheat exports to ensure it will have continued access to supply (Ukraine is a critical global producer of wheat and hence global demand for Indian wheat has increased). China has also been in Covid-related lockdown for several weeks which has served to further exacerbate both supply constraints and a softening global growth outlook.
Inflation remains a key focus for global central banks, with the US Federal Reserve having finally taken action to increase Interest Rates in the US after months of hesitation. “The Federal Reserve administered its biggest rate hike in 22 years as it raised the fed funds rate by 50 basis points” [i] to 0.75% from 0.25% on May 4th. This initially triggered a rally in the S&P 500 of 3% which was very short lived, however, as over the following week the market fell a further 8.6% to 3930 on 12th May. US Federal Reserve Chair Jerome Powell has suggested further rate hikes at the next Fed meetings later this year, stating he is prepared to take continued action until inflation shows convincing signs of retreat.
Markets need time to adjust and factor in rate hikes. In the UK, on 5th May the Bank of England (BoE) also took action to raise interest rates once again this year from 0.75% to 1% as the annual inflation rate in the UK hit 7%, the highest level in 30 years. The FTSE 100 fell c.3.8% in response as concerns for domestic growth increased. In Europe the ECB have yet to take action but key policymakers stated “Momentum is building for the European Central Bank to raise interest rates in July to fight soaring inflation, after dovish policymakers indicated they are ready to accept an end to almost eight years of negative borrowing costs” [ii]. Global Markets began the month on a downward spiral but from May 13th started to rally back, regaining some of their lost value.
The US Dollar has continued to surge throughout May reaching a fresh 20 year high on May 12th “as concerns persisted that central bank actions to drive down high inflation would crimp global economic growth, boosting the currency’s safe-haven appeal” [iii]. The Euro also remains weak which will likely drive higher imported inflation moving forward. This is yet another key factor that the ECB must take into consideration for raising interest rates this year and an issue they are keenly aware of.
Commodity prices remain very elevated, having recently touched their all-time highs in March which will offer no comfort for those anticipating lower inflation ahead. The WisdomTree Enhanced Commodities fund still hovers near the highs of March at 1570.80p as at the end of May.
On 16th May, Walmart Inc., considered to be the world’s largest retailer, fell 11.4% after reporting a 25% drop in quarterly earnings, cutting its full-year profit forecast and falling far short of expectations. Higher staff costs (hiring more employees to cover staff sick from Covid) and more expensive fuel ($160 million more than usual) took their toll on profits. Shoppers facing decades-high inflation made the conscious decision to move to lower margin basics. Clothing and home furnishing fared particularly poorly in what are usually profitable categories. “The results are unusual, though, because Walmart has been famously cost-conscious” [iv]. Walmart’s stock price reached record highs on 21st April 2022 of $159.87 (the price has since reduced by c.19.5%!).
Twitter has also had rather the rollercoaster ride since hitting its peak for 2022 at $51.70 on the back of the news that Elon Musk had made a deal to buy Twitter inc. for $44 billion cash (25th April). In May the stock dropped 27.7% after Musk “tweeted that he was pausing his bid as he awaited further information to confirm whether the social media company’s quarterly estimates of its fake accounts were accurate” [v].
Finally, some good news at the end of a testing month! Shanghai and Beijing, among other areas of China have announced easing Covid Restrictions allowing 22 million citizens to be able to travel once more. This is having a positive effect on Markets not only in China but also Japan was up by c.2% on the back of the news. Asian Markets will welcome this positive news and once the economy starts to re-open this will have a knock-on effect and could potentially prove positive for Europe. In the context of China’s reopening the price of Brent Crude Oil has increased to its highest level since the Ukraine Invasion ($122.84) which will add further pressure to headline inflation data.
To conclude the S&P 500 started the month at 4115.38 and dropped by 6.2% but had a late surge ending the month slightly higher at 4132.15. The S&P experienced its biggest drop in price (-4.04%) in the past 2 years on 18th May. The FTSE 100 has also seen a reduction during the month of 2.3% beginning the month at 7561.33 but had a late month surge ending slightly higher (7607.66). The German GDAX began April at 13,939.07 and finished 14,388.35 up 3.22%, after experience a 4% drop, while the French CAC40 began May at 6425.61 ended slightly higher at 6,468.8 after experiencing a 5.3% drop. The Italian MIB began May at 23,857.23 to end at 24,505.08, however saw a reduction of 4.3% during the month. To combine with the disappointing European Equity performance, the Euro has fallen to its all-time low against the dollar which will drive inflation higher in Europe. Japan’s Nikkei 225 began May at 26818.53 and ending slightly higher at 27,279.80, seeing a price drop of 4% during the month. Brent Crude has risen to $122.84 having started the month at $107.58.
Overall, it has been an extremely volatile month for asset classes across the board, particularly within equity markets. The best performers continue to be real assets and companies with sufficient pricing power to avoid suffering from inflation. The effects of Covid restrictions are still very much having an impact on global markets and will likely last longer than many anticipate.
[i] Bloomberg Points of Return – Be Warned – Powell Won’t Welcome Being Seen as Dovish
[ii] https://www.ft.com/content/273d2613-93b8-4224-8f81-7281337ab618
[iii] https://www.reuters.com/markets/europe/dollar-hovers-near-2-decade-high-cpi-keeps-aggressive-us-rate-hikes-likely-2022-05-12/
[iv] Walmart Flashes Inflation Warning Sign for Target and Consumer Economy – Bloomberg
[v] Why is Elon Musk really putting his Twitter deal ‘on hold’? | Financial Times (ft.com)
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