Sabco® Investment's Monthly Market Report - May, 2022

Sabco® Investment's Monthly Market Report - May, 2022

May was a month of significant price swings in the stock market, with both upward and downward movements. The S&P experienced a steep decline, marking the largest daily drop (-4%) in nearly two years and briefly pushing the U.S. stock market into 'bear market' territory. The negative sentiment was fuelled by disappointing prospects from retailers Target and Walmart, signalling potential headwinds for corporate earnings and equity markets due to rising costs and supply chain difficulties. However, towards the end of the month, stock markets recovered and remained relatively stable, supported by better prospects from other retailers, belief in peaking inflation, robust economic data in the U.S., and easing lockdown measures in China.

In terms of investment styles, value stocks initially outperformed growth stocks but later lost ground as growth stocks regained momentum with a stabilizing interest rate trend and improved market sentiment.

Bond yields, which had been experiencing upward movement in previous months, stabilized in May. U.S. 10-year yields reached a peak of 3.15% but then fell back to 2.84%, while German 10-year yields remained close to their recent high. Real interest rates in the U.S. rose above 0% for the first time since the pandemic but subsequently stabilized. Market expectations regarding central bank actions drove the shift in implied inflation expectations and the increase in interest rate spreads against Germany for other eurozone government bonds.

Corporate bond spreads continued to widen, reflecting a more challenging economic environment and tighter monetary conditions.

The Federal Reserve announced an expected 50 basis points interest rate hike and the beginning of balance sheet deleveraging. Additional interest rate hikes are anticipated, although some voices suggest a pause later in the year. The European Central Bank is also expected to implement its first interest rate hike in July, with discussions on ending negative interest rates. The Chinese central bank made a small rate cut for 5-year financing, while a reduction in the policy rate has not yet materialized.

In currency markets, the euro gained ground against most other currencies, particularly the dollar, due to changing dynamics in monetary policy expectations and improved market sentiment in equity markets. The Norwegian krone weakened against the euro despite rising oil prices, while the Chinese currency weakened against the dollar but showed some resilience due to improving COVID conditions. Emerging market currencies stabilized, except for the Turkish Lira, which continued its decline.

Oil prices continued to rise, with Brent crude closing above $120 per barrel, nearing its recent high. OPEC+ maintained its production increase plan, contributing to the upward pressure on prices. Industrial metals experienced a decline, mainly in the first half of the month, followed by stabilization as lockdown measures in China eased. The gold price hovered around $1,850 per ounce but closed lower overall, influenced by stabilizing bond yields and a weaker dollar.