Global equity markets continued their recovery in May, supported by improved investor confidence as trade tensions eased. Negotiations between the US and trading partners along with a temporary delay in planned tariff hikes contributed to reduced fears of a global economic slowdown and broad-based gains from markets. Fixed interest markets failed to make any significant progress overall with government bonds seeing negative returns amidst concerns of rising debt levels. Commodities were the worst performing asset class in May, with modest losses in aggregate, the gold price declined as demand for safe-haven assets faded, while oil and industrial metals recovered some ground thanks to increased demand.
US equities recorded strong gains during the month, led by the technology sector and solid earnings updates from major corporations including the likes of Nvidia. The S&P 500 Index rose by over 5% in sterling terms (6% in US dollar terms) in May, supported by broad-based performance across sectors. The economic backdrop remained stable, with investors responding positively to proposed tax reforms and signals that inflation, while still persistent, may be easing. Negotiations on tariffs by the US and key trading partners added to the positive mood and the losses seen in April being recovered. Unpredictable policy developments from the Trump administration along with the prospects of higher US tariffs, albeit not at the levels initially announced on ‘Liberation Day’, are likely to remain concerns.
In Europe, equity markets also moved higher, with financials and consumer discretionary stocks leading the way as the European Central Bank cut interest rates again by 0.25% to 2.00%, marking its eighth rate cut since June 2024. Hopes for further monetary and fiscal support together with progress in global trade talks contributed to gains across the region. A slightly improved economic picture, revisions to growth forecasts and stronger-than-expected corporate earnings were further positives.
Although the UK stock market lagged other leading developed markets, returns from the FTSE 100 Index were positive at 3.8% in May, defensive sectors such as consumer staples and utilities which comprise a substantial element of the UK market were less favoured as growth concerns eased. Proposed drug price reforms in the US negatively impacted the influential UK listed pharmaceutical sector. Stubborn inflation and rising UK government bond yields have also created challenging conditions for domestically focused companies with rising costs harder to pass onto stretched consumers and higher bond yields making dividend yielding stocks relatively less attractive. More positively, a limited US-UK trade deal was confirmed, boosting selected UK companies with substantial US earnings, Rolls-Royce for example. After May’s 0.25% base cut, the timing of further reductions seem in the balance with the Bank of England’s Monetary Policy Committee looking for further signs of inflation being supressed including lower wage growth.
Global fixed interest markets have seen volatility recently particularly in some areas of the government bond market including the US, where persistent areas of inflation, concerns over economic growth and the sustainability of long term government borrowing requirements and overall debt levels saw yields move higher. Longer dated government bonds were sold off and a downgrade of the US sovereign credit rating added to the pressure. Bond yields across much of the developed world followed suit including in the UK and Japan. There has been some divergence however, with those countries with improving fiscal positions including Italy outperforming. Bond markets saw some recovery towards the end of May as markets reassessed inflation risk and the potential for future interest rate cuts. Government borrowing costs will remain an important influence on wider markets however with government debt levels continuing to increase.
While government bonds have been under pressure, corporate bonds have seen stronger performance particularly higher yielding bonds, reflecting renewed appetite for greater risk as confidence improves on the prospects for economic growth.
Emerging market equities also made gains, helped by a weaker US dollar and stronger performance in the Asian technology sector, leading Taiwanese and South Korean companies benefitting from demand for semiconductors. Broader improvements in sentiment around China’s economic growth prospects was another factor. Political risk, US trade policy and uneven growth remain potential headwinds.
Markets remain sensitive to signals from central banks and global policymakers. While inflation trends appear to be improving, raising the prospect of further interest rate cuts following those in the UK and Eurozone in May and eventually cuts by the US Federal Reserve Bank, the outlook for growth, trade policy, government debt levels and geo-political events will continue to influence investor sentiment. Recession fears have eased for the time being and the potential impact on corporate earnings, nevertheless conditions for global trade are likely to be less accommodating than they have been. A balanced approach with suitable diversification across asset classes, geographical regions and equity market sectors remains the most effective approach for dealing with the evolving investment landscape.
Source of data: FE Analytics, www.bankofengland.co.uk, www.ons.gov.uk
This commentary in no way constitutes a solicitation of investment advice and should not be relied upon in making investment decisions. Past performance is not a reliable indicator of future results. The value of your investments can fall as well as rise and are not guaranteed.
