market #intelliGENce Jun 23

A detailed analysis of what's been moving markets over the last month

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In a nutshell

• Inflation falls, but less than expected

• More interest rate rises possible

• Negotiations on US debt ceiling cause volatility in Treasuries

• Markets go mad for AI, but gains are concentrated

What’s Moving Markets

In May, two key narratives took center stage in the financial sector: the ongoing US debt ceiling discussions and a surging interest in artificial intelligence (AI).

The crucial deadline for US Secretary of the Treasury Janet Yellen’s “X” date was met with tense negotiations. However, an eventual agreement to increase the debt limit and honor the nation's financial commitments was reached. Equity markets managed to remain mostly unscathed, yet there was a blow to short-dated Treasuries with June expiry dates yielding over 7%.

The potential for substantial growth in generative AI was another cause for market enthusiasm, leading to notable stock market returns.

US semiconductor giant, Nvidia, had an impressive first quarter, outperforming predictions thanks to the heightened demand for its data center products. A surge of $248bn to its stock momentarily propelled the company into the esteemed $1 trillion market cap club, putting it in league with Apple, Microsoft, Alphabet, and Amazon.

The headline US inflation rate dropped to its lowest point in two years, at 4.9%, though the news was not all positive.

Core CPI (Consumer Price Index) and core PCE (Personal Consumption Expenditure) deflator, both indicators of the more stubborn aspects of inflation, saw a 0.4% increase month on month. The rise was above expectations, suggesting potential future US interest rate hikes. Various Fed members have hinted at possibly skipping a hike in June while awaiting more data, clarifying that this would not signify a break. Hikes may recommence if following data does not show enough price deceleration.

For the UK, April's CPI report indicated a decrease in headline inflation to 8.7% from 10.1% in March. This figure remains significantly above both market and Bank of England predictions, suggesting likely additional interest rate hikes in June and August. Persistent issues with food inflation have led to expectations that Prime Minister Rishi Sunak will request retailers to limit the prices of essential food items.

The Bloomberg Commodity Index saw a decrease of over 5% in dollar terms, with reduced copper prices and a decline in oil demand contributing. With barrels now being sold for roughly $75, concerns loom over the upcoming OPEC meeting in early June, with expectations of another reduction in production. The media ban on reporters from Reuters, Bloomberg, and The Wall Street Journal heightened these concerns.

In Turkey, President Erdoğan secured a hard-earned victory in an election run-off, to the disappointment of investors who were hopeful that a win for his opponent would result in a shift towards traditional monetary policy and improved relations with the EU.

Asset class implications

Over the past few months, the comparative performance of UK equities to those in other regions has fluctuated noticeably. After leading the pack in April, they ended up at the bottom of the heap in May. The FTSE All Share saw a decrease of 4.63%, attributed to falling commodity prices, a result of uninspiring economic figures from China and a general mood of uncertainty.

US equities managed a 1.99% growth in May, but this superior performance was primarily limited to large tech companies, buoyed by the buzz around AI. In terms of the dollar, the Dow Jones fell by over 3%, while the Nasdaq rose by more than 7%.

Yields in government and corporate bond markets experienced another hike, as core inflation remained high in the US and hit a fresh peak of 6.8% in the UK. Markets are now factoring in more interest rate increases than they were a month ago. The FTSE Actuaries UK Conventional Gilts All Stocks index dropped 3.43% over May, whereas the ICE BofA Global Broad Market Index performed comparatively better with only a 0.56% decrease.

Chinese equities took a significant hit due to indicators of a decelerating economy. Property sales are not up to pre-Covid standards, youth unemployment has surpassed 20%, and there are indications of contraction in the manufacturing sector. On the flip side, Japanese equities yielded a 2.83% increase over the month, propelled by the tourism during the Golden Week holiday season.

Source: FE Analytics, GBP total return (%) to last month end