Bear market prevails in May

With both US and European interest rate decisions expected in the first week of May 2023, as well as the release of a host of macroeconomic data, there was much in the way of news flow and data to influence the direction of equity markets early on in the month. But while there was fodder for both bears and bulls the former prevailed resulting in a fall of 4.1% for the MSCI Europe ex UK Index.

In the US, the Federal Reserve delivered its 10th consecutive rate rise but the commentary accompanying the 25bps move seemed to suggest a pause was now to be expected with further action dependant on the analysis of the relevant data in the coming months. The ECB was less reticent and while the magnitude of the raise was the same, the suggestion was for a further two hikes in June and July. In addition, there was to be a step up in the rate at which the bank’s balance sheet is reduced. With regard to inflation, specific mention was given to wage increases which appear to be the most pressing problem following the continued declines in energy prices witnessed for much of this year. This was reflected in May’s year on year numbers with the headline and core rates falling to 6.1% and 5.3% respectively. Of less good news was the potential impact this restrictive policy is having on economic growth as Germany confirmed it entered a technical recession in the first quarter of the year.

Two important elections, in Turkey and Greece, saw wins for the incumbents while in Spain a snap general election was called by Prime Minister Sanchez following heavy defeats for his party in the local and regional elections. The fact that the main beneficiary of these elections was the Popular Party, which is considered right wing, meant this was viewed as a market friendly event. To complicate matters Spain is due to take over the rotating presidency of the European Union on July 1st just weeks ahead of the July 23rd date set for the general election.

Less market friendly was the continued prevarication between Democrats and Republicans over the US debt ceiling. While it always appeared too catastrophic for the US economy for an agreement not to be made, the closer to the deadline we got with no end in sight, the more jittery markets became. Disaster was of course averted, and the bill is now signed.

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