A monthly review of international markets: Which factors and policies influenced global indices and sectors in May? Read our monthly market review.
The devastating surge in Covid-19 cases and fatalities in India highlighted the importance of rapid vaccination rollouts. The US has lent its support to efforts, spearheaded by South Africa and India, to get the World Trade Organization to temporarily remove the patent protection on vaccines (Trips waiver), while a number of developed countries have indicated that they would consider sharing vaccine stock once they have vaccinated their entire populations. The latter may reap benefits faster given the complexity of setting up facilities and sourcing materials. However, this highlights that global collaboration is needed to help the world move beyond the pandemic faster.
Economic data continues to come in strong, providing clear evidence of the strengthening activity as economies reopen. The Organisation for Economic Co-operation and Development (OECD) revised its growth outlook to 5,8% from 5,6% in March but highlighted that the recovery remains uneven with emerging markets facing the most challenges. Its advice to governments: vaccinate and co-operate.
After a strong start to the year, markets have tempered their response of late, balancing improving data with the rise in input prices and potential for inflation further down the line. US corporate earnings for the first quarter easily beat expectations, with the latest data for S&P 500 companies recording earnings growth of circa 52% (yoy) relative to consensus expectations for circa 24% growth.
The S&P 500 gained 0,7%, while the Nasdaq 100 retreated 1,2%. Other equities markets gained more over the month, with strong performance from Europe and emerging markets against a weak US dollar backdrop and rising vaccinations in Europe. South Africa was one of the star performers in the emerging market universe, with the MSCI South Africa returning 7,2%, outperforming the MSCI Emerging Markets Index (2,3%) and the MSCI World Index (1,5%).
Despite US inflation gauges exceeding market expectations, bond markets took most of the data in its stride with bond yields barely moving. In US dollar terms, the Barclays Global Aggregate Bond Index returned 0,9% in May, while the Barclays Global Inflation Linked Index gained 3,0%.
The headline above from the recent OECD Global Economic Outlook points out some of the concerns bubbling away under the surface for financial markets. Accommodative monetary and fiscal policy played a big role during the pandemic and the recovery. Looking to the future, many are now asking what the cost will be and whether policy makers can coordinate a transition without unintended consequences.
US CPI and the Federal Reserve’s favoured measure of inflation, personal consumption expenditure, showed a marked increase in April, with both series exceeding market expectations. Consumer inflation expectations collected via market surveys have also increased, while activity indicators, like the purchasing managers’ indices, have for some time highlighted that businesses face rising input costs. Base effects play a big role, services inflation has remained muted, supply chain issues should resolve itself in time and the rise in used car prices should indeed be transitory. Yet, there is also evidence of upward pressure on wages, even as businesses reportedly struggle to fill jobs. Some attribute this to the enhanced unemployment benefits and other fiscal support measures. Several US states are now planning on scaling back that support.
While the multifaceted debate on future inflation will persist, the reaction function of policy makers has become even more intertwined. It may therefore serve policymakers to acknowledge that this is indeed no ordinary recovery and that both coordination, vigilance and a fine balance will be required to minimise the potential long-term cost of this transition.
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