May was a rather turbulent month on the markets which saw American markets book its largest single-day decline in 2 years. Nonetheless, as the month progressed, volatility settled down and markets closed nearly unchanged. Debates are raging around inflation, while central banks are finally stepping up to subdue it.

Early May the Federal Reserve raised short-term interest rates by 0,50% to 1,0%, the largest move since 2000. It had also increased it by 0,25% in March, which was the first increase in 5 years. Further increases are expected throughout this year. In addition the FED also detailed plans on unwinding its nearly $9 trillion balance sheet.

While overall inflation in the US slightly dipped year-over-year from 8,5% to 8,3%, a drop to 8,1% was expected, underlining the resilience of the consumer prices. It was nonetheless the first small decrease since September last year, providing some relief that inflation may not hold at the current levels, especially as the FED steps up its game. Also Core inflation, which excludes food and energy prices, decreased from 6,5% to 6,2%, but once again expectations were that it would have decreased more, namely to 6,0%.

Another concern is how this high inflation and interest rate increases will impact GDP growth. First quarter US GDP growth contracted by 1,5%. Year-over-year US GDP growth is still handily in positive territory now, but talk of a mild recession by year-end is becoming the talk of the street. So when halfway May major US retailers Walmart and Target announced disappointing quarterly results and cut their full-year forecasts, US stock markets took the biggest one-day hit since June 2020 because results of these massive retailers are often seen as a projection for overall consumer spending.

Nonetheless markets recovered in the latter half of May and the S&P500 and Dow Jones indexes closed the month unchanged while the tech-heavy Nasdaq booked a 2,05% loss.

A similar scenario played out in Europe where the DAX gained 2,06%, outperforming the Eurostoxx 50 which ended the month unchanged. The French CAC index dropped 0,99% and Slovenian SBITOP dropped 2,06% over the month.

Also the European Central Bank (ECB) is stepping up – while they have yet to increase the interest rate, it is now expected they'll do so sooner than previously projected, namely in the third quarter of this year. As was announced on the last day of the month, the urgency for monetary intervention is quite pressing as inflation in the Eurozone climbed from 7,4% to 8,1%, well above the expected 7,7%. the more aggressive rhetoric by the ECB contributed to the euro gaining 1,82% to 1,0733 against the dollar.

Meanwhile energy prices continued to gain with crude oil futures gaining 9,53% to 114,67 dollars per barrel and natural gas gaining 12,44% to 8,145 MMBTU. The ongoing war in Ukraine continues the upward pressure on oil and gas prices. On June 1, the EU also agreed to cut 90% of Russian oil imports by year-end in a move to further Russia's ongoing invasion. Another factor that that supported oil prices is that China, the world's largest importer of crude oil, loosened its COVID restrictions, providing some relief for the Chinese economy. The Hong Kong Hang Seng index closed May 1,54% in green.
 

Rudy Marchant
Fund manager Primorski skladi

Monthly reports - May 2022