Market Analysis May 2021

May marked gains in US equities as sectors reopened and vaccine distributions persisted, fostering optimism among investors. The composite purchasing managers' index (PMI) exhibited notable expansion, reaching 63.5 in April, propelled by the services sector's contribution, signifying its recovery. A 4.2% YoY rise in headline consumer price inflation in April, the highest since September 2008, triggered apprehensions of tighter monetary policy. Despite this, Federal Reserve officials remained cautiously hopeful about recovery, with discussions of tapering on the horizon if economic progress continues.

May's non-farm payrolls reported the addition of a mere 266,000 jobs, falling short of the anticipated one million. While the leisure and hospitality sector contributed 331,000 jobs, other segments such as car manufacturing, temporary help, and retail experienced setbacks. The unemployment rate slightly rose to 6.1%. Supply chain disruptions negatively impacted car manufacturing.

Q1 earnings underscored economic robustness, with the potential for the strongest earnings in over a decade. Sectors closely tied to economic growth, like energy and materials, flourished, while consumer discretionary sectors struggled due to semiconductor shortages halting auto production.

May brought forth continued upward momentum in Eurozone equities, outperforming other regions. The vaccine rollout gained momentum in several countries, with at least one vaccine dose administered to 43% of the German population and 38% for France and Italy by the end of May, as reported by Our World In Data.

Further relaxation of social and economic restrictions fostered increased optimism for the economic and business outlook throughout the remainder of the year. Strong gains were seen in energy, financials, consumer staples, and discretionary sectors, whereas healthcare, information technology, and utilities exhibited lagging performance.

Corporate earnings, despite the soft Q1 2020 comparison, showcased exceptional strength during the earnings season. Cyclically sensitive sectors performed well in terms of earnings, capitalizing on demand recovery, pricing influence, and supply constraints.

Forward-looking data remained optimistic, with the flash composite PMI reaching 56.9, a 39-month high. The services component registered substantial growth as Covid restrictions eased, driving heightened demand. While annual inflation confirmed at 1.6% for April, it rose to 2.0% in May. Despite an improved economic outlook, European Central Bank (ECB) policymakers indicated that it's premature to withdraw stimulus measures.

UK equities enjoyed an uptick in May as the economy progressively reopened, thereby enhancing consumer and business sentiment. However, concerns over the "Indian" Covid-19 variant and the potential delay of social distancing law removal on June 21 prompted some domestically focused sectors to relinquish recent gains. Nevertheless, multiple forecasters upgraded GDP projections for the UK.

The Bank of England's decision to slow down its quantitative easing program spurred apprehensions about sustained inflation repercussions. Domestically focused banks and life insurance companies outperformed the broader market. On the flip side, internationally diversified financials faced the brunt of sterling strength and a weakened US dollar. Despite robust crude oil and industrial metal markets, globally diversified resource companies faced underperformance due to currency impact concerns on dollar earnings.

The utilities sector thrived, buoyed by rising wholesale electricity prices, while defensively oriented sectors exhibited mixed performance. A resurgence of merger and acquisition activity was noted, accompanied by numerous new deal announcements.

In May, the Japanese stock market initially experienced a sharp dip in the second week, which subsequently recovered, closing the month up 1.4%. This turnaround was attributed to subsiding global inflation concerns. The yen exhibited slight weakness against the US dollar, contributing to positive equity market sentiment.

Persistently escalating Covid infections prompted the Japanese government to extend the state of emergency throughout May, particularly in Tokyo. Slow vaccine progress added to skepticism regarding the Suga administration's credibility. Consumer sentiment bore the brunt of the latest restrictions, although real-time data indicated milder impacts compared to previous periods.

The corporate results season concluded in May, with most firms reporting figures in line with or slightly exceeding consensus expectations. Successful cost control programs across various sectors contributed to the positive skew in results, as the ongoing global recovery continued to support industrial production.

Asia ex Japan equities experienced modest gains in May. India led the MSCI AC Asia ex Japan index in terms of market performance, despite grappling with rising Covid-19 infections. The Philippines and Pakistan also achieved strong gains, outperforming the index. China, Hong Kong, and South Korea achieved more modest gains. Meanwhile, Malaysia, Singapore, and Thailand concluded the month with negative performance due to mounting Covid-19 infections.

Energy, utilities, and healthcare sectors demonstrated robust performance, achieving solid gains. Conversely, consumer discretionary, communication services, and information technology sectors ended the month in negative territory.

Throughout May, government bond yields remained relatively steady, consolidating after early-year sell-offs. The US 10-year Treasury yield dipped by three basis points to 1.59%, while the UK's 10-year yield fell by 5 bps to 0.80%, following significant year-to-date increases.

The month's outset saw rising bond yields due to a 4.2% YoY surge in US consumer price inflation for April. European yields initially rose in response to vaccine distribution and economic recovery acceleration, subsequently retreating in the last week of May due to dovish ECB comments. The 10-year Bund yield climbed by 2bps to -0.19%, while Italy's and Spain's yields ended unchanged at 0.91% and 0.46%, respectively.

US investment-grade corporate bonds generated robust total returns, persistently outperforming Treasuries. European investment-grade bonds exhibited marginal weakness in line with government bonds. High-yield corporate bonds delivered positive returns driven by income. Emerging market bonds yielded positive returns, primarily propelled by high-yield sectors, outperforming developed markets. As commodity prices continued to rise, emerging market currencies generally demonstrated strength in light of a weakened US dollar.

Despite the buoyant equity markets, convertible bonds experienced pressure in May. Information technology, disruptive consumer sectors, and "Covid winners" in general ended the month with losses. The Refinitiv Global Focus index, measuring balanced convertible bonds, registered a -0.7% decline.