Although it was another month of threats and counter-threats from the United States and Iran, negotiations continued, and it appeared by the end of May that they were close to some kind of deal. While trickier issues like nuclear fuel remained unsolved, the chances of the Strait of Hormuz re-opening seemed to have increased, which was reflected in oil prices. Elsewhere, markets were buoyed by bumper earnings news and the prospect of the largest IPO1 of all time.

Figure 1: Oil and gasoline prices year-to-date

Source: Oil prices are US dollar per barrel. Gasoline price is the national average, in US dollar per gallon.

Starting with the US, May brought good and bad economic data. Energy prices pushed consumer inflation (CPI) up to 3.8%, although the Federal Reserve’s (The Fed) preferred measure2 only went up to 3.2%. With gasoline prices up over 50% on the year, consumer sentiment fell again to another record low. Despite the negative headlines, job growth and hourly wages both picked up and the unemployment rate held steady. There was no news on interest rates from the Fed, but Kevin Warsh was sworn in as the new chair. Jerome Powell stepped down but stayed on the board.

In the Eurozone, consumer inflation rose to 3%, and business surveys fell from expansionary into contractionary territory, complicating the inflation-growth balance for the European Central Bank. There was better news in the United Kingdom, where inflation slipped to 2.8%, job growth picked up, and the Q1 GDP3 report showed the economy grew faster than expected in the first quarter, led by personal consumption. Further afield, Japan also showed slower inflation and faster Q1 growth than expected.

Figure 2: 30-year government bond yields

Source: Bloomberg. Each bond yield is in its local currency.

Moving to markets, bond yields continued to rise through the middle of May, with the UK 10-year gilt breaking over 5% for the first time in almost 20 years. Most yields settled down later in the month as market fears of inflation and interest rates subsided, allowing bonds to generate positive returns. However, longer-term fears for fiscal sustainability still lingered in very long-term bonds, with 30-year yields hitting 21st century highs in the UK and Japan (see figure 2). There was little action in currencies, with the US dollar gaining slightly versus other majors, including the euro and pound. One notable exception was the Chinese currency, which continued its steady appreciation on the year.

Despite the lack of resolution in the middle east, stock markets had another strong month, up over 4% (in US dollar, slightly more in euro and pound). It was another blockbuster month for the technology sector, while energy stocks sold off again. In developed markets, the US and Japan led the way, but the real star performers were in emerging markets (“EM”), where Korea and Taiwan were up 37% and 15% on the strength of their chipmakers. The phenomenal growth in these stocks has changed the nature of the EM index, where Korea and Taiwan have both now overtaken China in size (figure 3). One negative in EM was Latin America where Brazil fell 9% on the month.

Figure 3: Extreme size growth in emerging markets

Source: MSCI. Market caps are shown measured in US dollars.

Finally, we also saw divergence in commodities in May. Energy prices declined on expectations for a deal with Iran (figure 1), while metals markets went different ways. Gold, which usually benefits from geopolitical uncertainty and inflation risk, continued its decline in the month. We expect that this was partly due to reduced macro fears, and partly due to previously accumulated speculative positions continuing to wash out. However industrial metals such as copper and aluminium surged on the month, on a combination of supply constraints and an improved industrial demand outlook.

Figure 4: Divergence in metal prices