Market Update – period ending 31 May 2023

2023 started positively as capital markets experienced their strongest January gains in recent years. The ‘risk-on’ sentiment resumed as inflation continued to moderate in developed regions (with easing energy and food prices the most obliging) and peak interest rates moved back into focus. In the US, headline inflation cooled for a sixth successive month to 6.5% year-on-year (y/y) in December from 7.1% a month earlier. In fixed income, bond yields fell after encouraging news on the inflation front.

The strong early advances from January were slightly offset in February as resilient economic data led many to reassess their expectations for both the peak in interest rates and the subsequent pace of rate cuts. Labour market data was particularly influential, with a half-decade low in the US unemployment rate and strong US jobs growth leaving investors second-guessing the prevailing disinflation narrative. In the UK and Eurozone, risks of a deep recession decreased significantly on the back of falling energy prices and an improved economic outlook. Elsewhere, a re-escalation in US-China tensions and a resurgent US dollar posed a slight mid-quarter headwind for emerging market equities.

The collapse of Silicon Valley Bank (SVB), and resulting concerns around the financial sector more broadly, hit bank shares hard in March. SVB found themselves in hot water after they were forced to sell their investments at a loss to cover large depositor outflows. US federal regulators were ultimately forced to intervene by setting up a short-term lending facility to guarantee deposits and limit the risk of contagion among other regional banks. Government bonds rallied as a flight to safety trade occurred, while the wider impact on equity markets was largely restricted to the financial sector. Despite stresses in the banking industry, the US Federal Reserve (Fed) forged ahead with raising rates by a quarter percentage point for the second time in Q1 – bringing the federal funds rate to a target range of 4.75% to 5% at quarter-end. Regardless of another turbulent ride, all major asset classes posted healthy returns for Q1 of the calendar year, except global listed infrastructure and commodities (with the latter negatively impacted by a dip in energy prices).

Despite forward-looking ruminations of a recessionary nature, investor sentiment remained largely positive in April. Investors were initially spooked following the release of minutes from the Fed’s March meeting predicting that the US would fall into recession “later in the year”. US CPI data then came in at a two-year low of 5.0% y/y, although Core CPI (which excludes volatile baskets such as energy and food) rose to 5.6% y/y. The idea of stickier inflation reaffirmed belief that the Fed had at least one more rate hike in store. Investors moved on quickly as a strong earnings season boosted global equity markets, seeing the S&P 500 finish the month up 1.6%. Although April ended with few surprises, continued rumblings in the US banking sector and recessionary fears painted a picture of uncertainty for the coming months.

Global equity markets were mostly negative in May as US debt ceiling negotiations cast a shadow over investor sentiment. The gains that did occur were largely limited to US large-cap tech stocks in what was a poor month all round. In the banking space, First Republic Bank became the latest US lender to declare insolvency, surpassing Silicon Valley Bank (SVB) as the second largest US bank failure in history. However, regardless of another blow to the health of the US banking system, wider concerns around the sector generally abated as the month progressed. In other news, May brought a fresh round of rate hikes from global central banks but also saw further progress on the disinflation front, as the market continued to seek out that “goldilocks zone” of both softer inflation and looser financial conditions.