Market Pulse - May 2021

Key themes

Covid-19 global case numbers fall

US inflation surges

Will the US start scaling back its asset purchases?

A torrid month for cryptocurrencies

Markets snapshot

The MSCI AC World equity index rose 1.1% (0.0% in euro terms).

Europe outperformed, rising 2.8% in euro terms as the economic outlook continued to improve as more people were vaccinated.

Pacific Basin equities rose 1.9% (0.6% in euro terms), with Australia benefiting from the ongoing strength in commodity prices and the ongoing dovish monetary policy stance taken by the Reserve Bank of Australia.

The US lagged, rising 0.5% (-1.1% in euro terms), as inflation concerns were a drag and other regions benefited from improving sentiment towards global growth.

Eurozone >five-year bonds fell -0.1%, with the German 10-year yield rising slightly to -0.19%. Yields had peaked at -0.07% on inflation fears after the higher-than-expected US inflation reading and some mixed messaging from the European Central Bank (ECB). Yields declined in the second half of May, as inflation fears began to ease and the ECB eventually appeared to provide more dovish policy guidance.

Peripheral spreads narrowed, with Italian and Spanish 10-year year spreads falling to 110 basis points (bps) and 65bps, respectively, supported by policymakers’ rhetoric which suggested asset purchases will be maintained at higher levels through the third quarter.

The euro rose against the US dollar to 1.2228, as sentiment towards Europe improved on the back of the faster pace of vaccine rollout and an expectation that proceeds from the EU Recovery Fund will begin to be disbursed in the second half of the year.

The dollar was also weaker as the Fed suggested that monetary policy will stay relatively loose for the time being.

Commodities rose 2.5% (1.3% in euro terms), with West Texas Intermediate (WTI) oil rising 4.3% as the failure in ongoing negotiations to revive the US/Iran nuclear deal helped support the oil price.

The continued recovery in the global economy was also seen as boosting demand for commodities

Gold rose 7.8%, supported by the weaker US dollar and lower US real yields.

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