Still an inevitably complex month for the financial markets with inflation and all its causes (pandemic, war, sanctions, rising commodity costs, etc…) being the main issue. The remedy put in place by the major Central Banks, raising interest rates and tapering, is having negative effects as it is troublesome for consumers and businesses and therefore potentially demaging to economic growth dynamics.
The sharp rise in inflation has led the major Central Banks to implement tighter monetary policies. The U.S. Central Bank (FED) raised interest rates by half a percentage point to a range of 0.75% and 1%. This is the first increase of this tenor since 2000. The decision was taken against a backdrop of strong inflation after reaching a peak growth of 8.5%. It also announced plans to reduce the balance sheet by an initial monthly amount of $47.5 billion starting in June; the amount will be increased after three months to $95 billion. Even in Europe, where the growth outlook is more uncertain than in the United States, the European Central Bank (ECB) appears much more concerned about inflation risks-consumer prices rose 8.1% on a yearly basis exceeding expectations which were estimated to be +7.7% than about downside risks to growth. For this reason it will continue to tighten its policy during 2022, most likely beginning to raise the benchmark rate by 25 basis points in July. Bucking the trend is the People’s Bank of China, which restored some optimism in Asia by cutting the benchmark interest rate for real estate mortgages for the second time this year. This is a concrete sign of a willingness to support the economy, whose difficulties were confirmed by April’s drop in industrial production and retail sales compared to the same month last year.
Speaking of equity markets, we have seen more stability than the broad correction that has been underway since the beginning of the year, with significant sectoral divergences once again disfavoring technology stocks in favor of value stocks. In the United States the SP 500 index closed the month slightly negative -0.56% while Nasdaq technology index closed at -3.60%. Since the beginning of the year we are in negative territory of -13.30% for SP 500 and -22.70% for Nasdaq. Positive European market performance with Euro Stoxx 50 at +1.50% (-10.60% since the beginning of the year) as well as Asian markets with Nikkei +1.70% and Hang Seng +1.50%. In negative territory Swiss SMI index ending the month down 3 % with a performance since the beginning of the year of -9.80%.
On the whole, the economic data were reassuring. Preliminary PMI indices for May showed that economic activity in major countries is still expanding, albeit at a slower pace than in April. In fact, inflation is eroding consumer purchasing power, and manufacturing activity is suffering the most due to supply difficulties and higher commodity prices. However, we still expect turbulence in the markets as long as there are no concrete signs of falling prices.