Market Overview

Summary of world equity markets in May

Confidence continues to deteriorate: Concerns over inflation and the outlook for monetary policy and economic growth continued to preoccupy investors in May. The FTSE 100 Index  edged up by 0.8% over the month, while the FTSE 250 Index fell by 1.4%. Consumer confidence fell to its lowest level since at least 1974 during May, according to a survey undertaken by GfK.

Energy costs drive up inflation: Although the UK economy  grew by 0.8% during the first three months of the year, it contracted by 0.1% during March as the cost of living continued to rise. The UK’s rate of inflation  surged from 7% in March year on year to 9% in April as higher energy costs took effect. The Government  subsequently announced a package of measures worth £15 billion in a bid to alleviate the impact of higher energy bills, including universal discount of £400 on energy bills. The measures will be financed partly by a 25% windfall tax on the profits of energy firms.

Labour market conundrum: Wage increases are failing to keep up with inflation: average pay (excluding bonuses) increased by only 4.2% during the first quarter. Meanwhile, the rate of unemployment declined to 3.7% during the first three months of 2022 and, for the first time on record, the number of unemployed people in the UK was outstripped by the number of vacancies.

BoE tightens again: The Bank of England (BoE)   raised its key interest rate by 25 basis points to 1% during May, bringing it to a level  last seen in 2009. Against a backdrop of intensifying inflationary pressures, central banks around the world have announced more than 60 increases in key interest rates over the past three months, according to analysis undertaken by the Financial Times , representing the largest number since the beginning of 2000.

BoE Governor warns of uncertainty: BoE Governor Andrew Bailey  warned that the prospect of further food price increases is a “major worry” for the UK and other countries around the world. He believes that a “very big income shock” caused by rising prices is set to curb demand and push up unemployment and will have a more significant impact than higher interest rates. In his statement to the Treasury Select Committee, Mr Bailey apologised for sounding “apocalyptic”, but said: “There is a lot of uncertainty around this situation”. 

Fed raises rates by 50 bp: Markets were choppy during May as investors’ ongoing preoccupation over inflation was compounded by a raft of interest rate increases. The US Federal Reserve (Fed)  raised its key interest rate by 50 basis points during May to a range of 0.75% to 1%. Fed officials are set to implement further tightening measures during 2022, with the federal funds rate  forecast to reach almost 2% by the end of the year.

US inflation remains at a four-decade high: Inflationary pressures moderated slightly in the US during April: the rate of consumer price inflation  eased from 8.5% year on year in March to 8.3% as petrol price rises eased. Nevertheless, it remained at a four-decade high, underpinned by rising prices for housing, food and travel. The Dow Jones Industrial Average Index  ended May largely unchanged, while the yield on the US 10-year Treasury bond  rose above 3% for the first time in over three years during the month.  

Inflation grips Europe: Europe’s annualised rate of inflation  surged from 7.4% in April to a fresh all-time high of 8.1% during May, driven up by energy prices. Some countries in the euro area – including Estonia, Lithuania, Latvia and Greece – are experiencing double-digit annual inflation rates, whereas inflationary pressures in countries such as Malta and France are comparatively muted at 5.6% and 5.8% respectively. The European Central Bank (ECB), however, believes  that inflation in the eurozone is set to be “on target over the medium term”. The Dax Index  rose by 2.1% during May.

ECB tightening in sight: Amid heightened expectations of monetary tightening in Europe, the yield on Germany’s benchmark goverment bond  breached 1% during May. ECB President Christine Lagarde  commented: “We are likely to be in a position to exit negative interest rates by the end of the third quarter.” 

Rates rising in Asia: The Reserve Bank of India  increased its benchmark rate by 40 basis points to 4.4% in a bid to curb inflationary pressures, and the Reserve Bank of Australia  raised its key interest rate by 25 basis points to 0.35% during the month – its first rate increase  in over a decade. Elsewhere, Japan’s economy  contracted by 1% year on year during the first three months of 2022. The Nikkei 225 Index  climbed by 1.6% over May.