Since the end of the first quarter of this year markets have, overall, been meandering sideways. Some months, like April, are characterised by across the board weakness and others, such as May, are the opposite. This emerging pattern is one of sideways drift, as investors and asset markets search for both conviction and catalysts as we enter the summer months.
Looking back at May in isolation, it was a clear rebound month for equity markets, driven mainly by a healthy economic environment and resilient sentiment. A few data releases here and there did point to a cooling down in the important US economy, but the more closely watched indicators still continue to illustrate ongoing strength. Bond markets, by contrast, have had a much tougher time this year, as wildly over optimistic expectations for interest rate cuts have been steadily dialled back in the light of economic strength and stickier than expected inflation numbers. As we write in early June, for example, investors now only look for one interest rate cut in the USA this year, compared to six or so in January.
May was also a month punctuated by a wide variety of political election news across the globe, covering countries as diverse as Mexico, South Africa, India and the UK. Apart from the UK, where the calling of a surprise early election did not cause much of a reaction in markets, elsewhere there have been several large knee jerk reactions in currency and stock markets to the local results. We do not want to draw too deep a point from these election results or the initial market reactions, but it is also clear to us that even in regions where the outcome was ‘expected’, the electorates still managed to spring surprise ‘twists’ on pollsters and investors. It is a lesson we will keep in mind as we head into the important US elections in Q4, where volatility around the event could be particularly high.
