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Quick TakeGlobal markets extended their gains in May: US equities again led the way, with the S&P 500 rising 5.26%, the Nasdaq gaining 8.43%, and the Russell 2000 advancing 4.37%. European markets also moved higher, with the STOXX Europe 600 up 3.20%, while Australia's ASX 200 rose 1.15%. Although the conflict with Iran kept markets volatile, sentiment improved as oil prices retraced from earlier highs and optimism towards artificial intelligence persisted. The United States set fresh records: Major indices reached new highs as signs of progress towards a negotiated settlement with Iran eased energy supply concerns and pushed oil prices back below US$90 per barrel. A strong first-quarter earnings season and continued enthusiasm towards artificial intelligence provided further support. However, firmer inflation data kept policymakers cautious, bond yields moved higher, and Kevin Warsh replaced Jerome Powell as Chair of the Federal Reserve. Europe and Australia also advanced: European equities edged higher despite weaker activity, with the European Central Bank moving towards a June rate rise while UK tightening expectations eased. In Australia, the RBA lifted the cash rate 0.25% to 4.35%, though softer employment data tempered further tightening expectations. Overall, May extended the recovery, but persistent inflation and slowing growth continue to cloud the outlook. |
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In the United States, major indices reached fresh record closes despite ongoing geopolitical uncertainty. The conflict with Iran remained in an uneasy status quo for much of the month, although developments late in May suggested the two sides could be moving towards an agreement that would extend the ceasefire and allow for more detailed negotiations. This progress helped ease energy supply concerns, and oil prices fell sharply, with crude moving back below US$90 per barrel. Equity markets were supported by continued enthusiasm towards artificial intelligence and a strong first-quarter earnings season, which delivered the best profit growth in several years. Inflation nonetheless remained a key concern, with firmer price data and elevated energy costs keeping policymakers cautious. Bond yields moved higher and the US dollar strengthened. In a significant development, Kevin Warsh replaced Jerome Powell as Chair of the Federal Reserve, although markets noted that the inflation backdrop may limit his scope to ease policy.
In Europe, equity markets edged higher despite a deteriorating economic backdrop. Business activity weakened further, with both the Eurozone and the United Kingdom moving deeper into contraction, while the European Commission cut its growth forecasts and raised its inflation projections. Against this backdrop, the European Central Bank moved closer to a near-certain interest rate rise in June, citing persistent energy-driven inflation pressures. By contrast, expectations for further tightening in the United Kingdom eased as economic data weakened materially and political uncertainty increased following the Labour government's poor local election performance. Bond yields were volatile, with the German 10-year yield reaching a fifteen-year high before retracing, while UK yields rose to their highest level since 2008 before easing into month-end.
In Australia, the ASX 200 rose 1.15%. The Reserve Bank of Australia raised the cash rate 0.25% to 4.35%, citing additional inflation pressures stemming from developments in the Middle East on top of already elevated domestic inflation. However, softer data later in the month tempered expectations for further tightening. Employment unexpectedly fell and the unemployment rate rose to 4.5%, its highest level since November 2021, while headline inflation slowed to 4.2% over the year, although underlying inflation ticked higher. The Australian dollar remained steady at US$0.7195 and the 10-year government bond yield declined to 4.84%. The Federal Budget, delivered mid-month, also introduced significant changes to capital gains tax and negative gearing arrangements from 2027.
Overall, May delivered another month of gains for global equity markets, supported by easing energy prices and continued optimism towards artificial intelligence. The environment nonetheless remained challenging, with persistent inflation, slowing growth and ongoing geopolitical risk clouding the outlook. The key question for investors is whether markets can sustain their momentum, or whether the combination of stagflationary pressures and tighter financial conditions begins to weigh more heavily on growth.