Market Commentary

Global share markets were broadly positive in May, with periods of volatility on news about peace talks in the Middle East. The MSCI World Index ‒ Net returned 4.47% in unhedged AUD terms. In hedged AUD terms the index returned 4.83%. The MSCI ACWI - Net returned 5.08% in unhedged AUD terms. In hedged AUD terms the index returned 5.41%.

The US was one of the strongest performing developed markets. Major indices reached record highs in the month with tech manufacturers leading the way. Micron, Qualcomm and Marvell benefitted from sustained demand for AI data centres and related infrastructure. Micron briefly reached US$1 trillion in market valuation on a sharp rally. Strong corporate earnings reports also supported performance. The rally was concentrated, with eight of eleven sectors in the S&P 500 losing ground over the month, however more than half of the shares in the index were trading above their 200-day moving average (which indicates longer-term upward trends). That number was below 50% early in the month, per Dow Jones Market Data. 

Positive corporate reporting at the end of May created a risk-on appetite that drove markets, though concerns about unresolved tensions in the Middle East and oil prices lingered. Per FactSet analysis, 85% of companies that reported earnings in the S&P 500 beat estimates – better than the 5-year average of 78% – which reinforced optimism. There was also some optimism around small-cap companies, with the Russell 2000 index outpacing the S&P 500 in the last week of the month.

Emerging Markets were mixed. South Korea was among the strongest global performers due to AI enthusiasm. Chipmakers SK Hynix and Samsung saw their valuation soar past US $1 trillion during the month. SK Hynix’s share price has risen more than 200% in the year to the end of May. China was a drag on broader emerging market benchmarks despite stronger industrial profit data, which showed profits up nearly 25% year-over-year in April. Investor concerns were namely around an uneven recovery and regulatory scrutiny about offshore Chinese equity access.

AI-related hardware demand was also a boost to Taiwan and Japan. The Nikkei 225 briefly reached record highs late in the month before giving back some gains due to low inflation concerns. Foreign inflows were a boost to Japanese shares. Key inflation measures reported in May were below the Bank of Japan's 2% target, although this was partly due to automotive fuel subsidies enacted by the government to manage price hikes from supply challenges.

Europe was broadly positive but lagged the United States and Asia due to slower growth as well as energy concerns coming out of the Middle East conflict.

Central bank activity

Interest rates were held by most central banks through the month; Australia was again the exception, raising its rate by 0.25% (which was widely expected). This was the third consecutive rate increase from the central bank. Members of the Monetary Policy Board discussed the potential that financial markets were under-pricing downside risks associated with the conflict in the Middle East.

Comments after various bank meetings indicated a shift toward proactive rate hikes to tame inflation caused by the ongoing conflict in the Middle East.

The US Federal Reserve left rates unchanged at its meeting at the end of April, though outgoing Chair Jerome Powell hinted that there could be a shift coming at the organisation’s next meeting. Powell’s successor, Kevin Warsh, was confirmed as the next Fed Chair late in the month. Fed Governor Christopher Waller, who previously advocated for a proactive rate cut to protect the labour market, said in mid-May that the central bank’s next move is as likely to be a hike as a hold or cut. 

Bank of Japan (BoJ) Governor Kazuo Ueda made remarks late in the month that led markets to believe that the bank would increase rates in June. The BoJ did not hold a Monetary Policy Meeting in May.

The European Central Bank (ECB) left rates unchanged but suggested that an increase was in the cards for June. It was a similar story from the Bank of England (BoE) which was focused on wage growth risks as well as energy-driven inflation. The Swiss National Bank maintained exceptionally low interest rates, relying on currency strength rather than tightening policy to contain inflation. 

Australian activity

Australian shares ended the month positive though experienced significant volatility in May, with the S&P/ASX 300 Accumulation Index closing the month up 1.25%.

Australian markets posted their second consecutive monthly gain though experienced sharp swings on macroeconomic and geopolitical concerns. Shares fell on the penultimate day of the month on oil price concerns and rose sharply on the final day due to positive developments out of the Middle East and a tech market rally. The volatility led to a near $50 billion wipeout during a sell-off linked to renewed conflict in the Middle East and rising oil prices. Energy sensitive sectors were of particular focus, including airlines and transportation due to fears that rising fuel prices and supply chain costs would have an outsized impact. While Australian shares ended positive, they underperformed global equivalents.

Inflation concerns weighed on the broader economy, pushing the Reserve Bank of Australia (RBA) to raise interest rates during the month, a move that was widely expected. Headline inflation reports for April were positive, however, easing to 4.2% from 4.6% in March. A large part of that was due to a reduction in automotive fuel prices, which fell around 7% during the month after rising more than 30% in March. The price drop was due in part to a reduction in the fuel excise, a measure by the federal government to ease the strain on motorists.

Fixed income performance

Global bonds provided modest returns in May, with the Bloomberg Global Aggregate Index – $A Hedged returning 0.67%.

Global bonds ended higher despite a broad sell-off early in May, with investors seeming averse to government debt as central banks are being pushed to raise rates to manage inflation stemming from surging oil prices. Progress in peace talks and weak economic data brought yields down and boosted prices later in the month. Japanese bond performance is a good example, with the 10-year government bond yield reaching the highest level since September 1996 while the 30-year yield reached a record high. The Japanese yield is notable because of the nation’s reliance on oil that comes through the Strait of Hormuz but the increase wasn’t the largest among major economies; UK yields rose more (though did not reach record levels) and similar yield increases were seen in the US. 

The Australian bond market was higher, with the Bloomberg AusBond Composite 0+ Year Index ahead by 1.62%.

Bond prices rallied (yields fell) toward the second half of the month as investors reassessed near-term monetary policy following employment data and lower (though still elevated) inflation. Australian bonds, particularly government bonds, outperformed international equivalents.

The Australian dollar hit a four-year high of roughly US$0.7277 early in May before pulling back due largely to geopolitical tensions.