May was a challenging month for global stock markets as investor sentiment soured due to concerns about tightening monetary policy. Inflation data reached new highs in the US, UK, and Europe, leading to expectations of central banks taking action to control rising prices. The World MSCI Index fell 8% in US dollar terms, with growth stocks, particularly in the Nasdaq, experiencing their worst monthly decline since the 2008 financial crisis.
The depreciation of the GBP/USD exchange rate provided some cushioning for sterling-based investors, resulting in a roughly 4% drop in global equities in sterling terms. The Bank of England's relatively less hawkish path compared to the US contributed to the depreciation of the pound. UK large-cap stocks performed relatively well, ending the month with a small gain, primarily driven by energy stocks. However, mid- and small-cap shares in the UK experienced declines.
European equities posted modest losses of around 2.5% for the month. The ongoing Russian invasion of Ukraine posed a significant geopolitical risk that had a greater impact on Europe than the UK or US. Russia's strategic shift, focusing its forces on the Donbas region and pulling back troops from Kyiv, suggested a lesser chance of a complete invasion but reduced the likelihood of a swift resolution to the conflict.
Bond prices fell as yields rose in anticipation of aggressive central bank tightening. The US 10-year yield reached its highest level in over three years, causing mortgage rates to rise as well. UK Gilts performed slightly better than sterling corporates, while inflation-linked bonds and emerging market bond indices experienced declines.
The US dollar appreciated across the board due to expectations of the Fed being the most hawkish among major central banks. The Bank of Japan (BoJ) stood pat on its policy, maintaining zero bond yields and further accentuating the policy divergence between the US and Japan. The USD/JPY rate rose above 130 as a result.
Persistently elevated inflation readings, along with supply chain disruptions caused by China's zero-Covid-19 policy, contributed to the aggressively hawkish stance of the Fed. The oil price stabilized in the range of US$100 to US$110, while European natural gas markets experienced heightened volatility due to the threat of prolonged disruption to Russian supplies.
Gold declined over 2% in May as investors focused on rising real rates and a strengthening US dollar, looking past its perceived safe-haven status.
Inflation metrics remained a key focus in economic data, with new highs recorded in the US, Eurozone, and UK releases. Growing belief emerged that US inflation could be close to peaking. While some weakness was observed in economic activity, labor markets, especially in the US, remained strong.
Corporate earnings season was generally positive, with sales and earnings per share beating consensus forecasts in the US and Europe. However, markets focused more on valuations as rising rates and other assets offering returns made high-valued growth shares appear less attractive, leading to share price declines and earnings multiples compression.