The wild swings of the end of the market turmoil are not necessarily as follows: report
Sell in May? They certainly did, but rather than disappear as the old stock market adage suggests, traders came back to aggressively buy the dip, causing some of the craziest monthly swings in recent times.
There was plenty of selling in the first half of the month across all asset classes, driven by aggressive central banks, inflation and China’s lockdown policies. But markets subsequently began to reduce expectations of higher interest rates in the United States.
Now, concerns about rising prices are back in the fore; On Tuesday, oil climbed above $123 a barrel and eurozone data showed record inflation of 8.1% in May.
All of this means “there will be a great degree of skepticism in the market that we haven’t seen the bottom of yet,” said Stuart Cole, chief macro strategist at Equiti Capital.
Below is a summary of how some major asset classes performed this month:
US 10-year Treasury yields end in May near their starting point, but in between there was a rise to 3.5-year highs above 3.2%, a fall to six-week lows, then another rise on the last day of the month.
These moves are consistent with the ebb and flow of Fed rate hike expectations, which in early May implied that US interest rates would peak above 3.3%.
Growth fears and weak economic data took that bet down to around 2.9%, before soaring oil prices and hawkish comments from Fed Governor Christopher Waller pushed futures higher. by 3%.
The lack of visibility on interest rates and the economy will “continue to fuel volatility”, said François Savary, cio of wealth manager Prime Partners. “Where is the terminal rate, still remains the key question.”
Bets on the European Central Bank have swung even further. Some 175 basis points of rate hikes are forecast for the year ahead, up from 123 basis points in early May, as policymakers signaled an exit from negative rates by September.
Chart: Cooling Rate Bets
V-shaped month on stocks:
MSCI’s global equity benchmark had burned nearly $5 trillion in value at its low on May 9 from its peak for the month, hitting its lowest in about 18 months.
From that point on, the index rebounded 8% as markets called off the Fed’s more aggressive tightening bets. Thus, the MSCI World index should end the month of May with a small gain, returning to a market capitalization north of 60 trillion dollars.
The equity segment arguably most vulnerable to interest rate swings – US tech – meanwhile plunged 15% in the first 20 days of the month, before rebounding 12%.
Goldman Sachs said a sustained rebound hinged “on further clarity on how fast inflation decelerates from here, the monetary policy response and the implications for the growth outlook.”
Dubious US corporate bonds also saw wild swings, with risk premiums demanded by investors rising to 494 basis points from 405 in early May. They are now back at 419 basis points.
Chart: MSCI AC World Market Cap
A hawkish pivot from the ECB breathed new life into the euro, pushing it up as much as 4% from five-year lows hit earlier this month.
However, as the impending end to negative interest rates in the euro zone has sent the US dollar index down to its highest level in two decades, investors are wary of cries of “peak dollar”, given that the Fed shows no signs of slowing down in its policy tightening campaign.
And as the European Union prepares to cut Russian oil imports, the threat of recession could come back to haunt the euro.
Chart: King dollar
Markets were rocked by the mid-May collapse of TerraUSD, a stablecoin that lost its 1:1 dollar peg, causing other crypto assets to fall sharply.
But unlike equities, they have not experienced any significant rally.
On May 12, three days after the breakout of the TerraUSD peg began, bitcoin fell to $25,401, its lowest level since December 2020. The largest coin by market cap ended up losing around 20% to during the month, its biggest monthly loss in a year.
By the time TerraUSD collapsed, the total market capitalization of all cryptocurrencies had fallen to $1.14 trillion, according to CoinMarketCap. It now stands at $1.3 trillion, down about 25% this month and more than 56% below November’s peak of nearly $3 trillion.
Holders of TerraUSD and its related token, luna, suffered losses of around $42 billion, according to estimates by blockchain analytics firm Elliptic.
Chart: Crypto v2
In oil markets, there were none of the yo-yos from other asset classes seen this month.
Instead, Brent crude futures posted a sixth consecutive month of gains, the strongest streak of gains in a decade, adding to the headaches of policymakers struggling to contain inflation.
Brent crude rose above $124 a barrel on Tuesday, its highest since March 9, after European Union leaders agreed to cut oil imports from Russia by the end of the year.
Prices found further support as China announced the end of its COVID-19 lockdown and will allow Shanghai residents to leave their homes and drive their cars from Wednesday. This will likely increase global energy demand, just as holiday season demand increases during the Northern Hemisphere summer.
Chart: Brent Crude
(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)