General | June 3, 2022
Volatility dominated the market in May, with the rapid shift to tighter monetary policy, persistently high inflation, geopolitical risks and lockdowns in China fueling fears of a global recession and weighing on investor sentiment. However, equity markets got some respite as attractive valuations and hopes that inflation might peak brought bearish buyers to the fore at the end of the month. Still, lingering concerns about aggressive central bank tightening to fight runaway inflation and its effects on growth and earnings should keep investors nervous.
It’s been a rollercoaster month for equity investors. After suffering heavy losses at the beginning of May, global equity markets regained ground towards the end of the month. The MSCI All Country World fell -0.1%. The S&P 500 was skewed throughout the month and saw seven days of trading moves above 2%. After being on the edge of the bear market, the S&P 500 rebounded to end the month virtually unchanged. The S&P/TSX lost -0.2%, while international developed (+0.2%) and emerging (+0.1%) benchmarks posted a modest gain.
The deep rout in the bond markets eased somewhat as pissed off investors moved into safe havens. After breaking through the 3% mark, the yield on 10-year US Treasuries reversed course and ended the month at 2.84% (-9 basis points). Meanwhile, the yield on 2-year Treasury bills fell 16 basis points to 2.56% as investors curbed their aggressive bets for fed funds rate hikes after some early signs of a slowdown in the economy. inflation and after a Federal Reserve official floated the idea of a “pause” in September. in rate hikes. Government of Canada yields barely budged, with the 10-year yield rising 2 basis points to 2.89%, while the 2-year yield rose 4 basis points to 2.66%. The Barclays US Aggregate Bond Index gained 0.6%, while the FTSE Canada Bond Universe fell -0.1%.
The greenback’s incessant rise came to a halt in May in a context of convergence in the policies of the world’s central banks, which favored the euro (+1.8%) and the Canadian dollar (+1.7%). Specifically, the euro strengthened after the European Central Bank’s hawkish tilt, with President Lagarde providing the clearest signal yet that take-off will begin in July with an exit from negative rates by the third trimester. The Canadian dollar rallied after strong inflation data highlighted the Bank of Canada’s rush to neutrality, while rising crude prices also supported the loonie.
Finally, oil prices rose for a sixth consecutive month, the longest winning streak since 2011. Prices showed remarkable strength alongside a tightening in the energy market, as the conflict in Europe dampened supply at a moment of robust global demand. Gold capped a second monthly decline, led by the prospect of a rapid rise in interest rates as the Fed tackles the highest inflation in decades. Copper retreated as concerns over a darkening outlook for the Chinese economy grew. It should be noted that factory activity contracted in May, underscoring the continued impact of COVID outbreaks and lockdowns on the world’s largest metal-consuming economy.