The equity markets performance on the last day in May reflected the manner it spent most of the month, on a downward trend as trade wars and a weakening of economic data has concerned equity investors. The S&P 500 has fallen over 6% from the start of the month, however, despite this correction remains up 10% year to date. US equities have now given up all the gains for the past 12 months. Sentiment is now fearful an economic recession is closer than we think. On Friday the announcement that Trump was imposing a 5% tariff on all goods coming in from Mexico, adding to fears of a global trade war. The recent inversion of the US yield curve considered a lead indicator for economic recessions, what many market commentators are focussing on.
Sentiment has moved further into fear territory, even though the Vix index does not entirely reflect that. The index closed below 20, and below the level it reached earlier in the month. This could suggest either complacency or confidence that the trade discussions will eventually resolve themselves. In the wake of trade tariffs manufacturing data across the globe is weakening, the recent Chinese official PMI showed that China’s manufacturing sector had moved back into contraction.
Two events that may influence sentiment amongst investors in the coming month will be the G20 summit and will China and America have ironed something of a settlement? The other will be the meeting of the Federal Reserve on June 18th and 19th. Will the Federal Reserve give some hint it is considering cutting interest rates? Richard Clarida, the Federal Reserve vice chairman said this week that the committee is prepared to ease monetary policy if they see mounting risks to a recession. The Fed will have noted that Friday’s inflation data reported that inflation as measured by their preferred method remains below their target. On Tuesday the Fed chair speaks in Chicago at a two-day conference on the Fed policy update. During the week there is a selection of data providing information as to the strength or otherwise of the IUS economy.
The rally in bonds continues, ten-year German bunds now yield a negative 20 basis points. UK ten-year gilts yield just over 1%. Inflation will likewise be the focus in Europe this week as the latest eurozone data will more than likely show a fall in the headline inflation rate. Expectations are for something just over 1%. The stresses in Europe continues to be seen as yields on Italian debt rose above the equivalent maturity of Greece.
As for the UK Donald Trumps arrival for State visit will be heavily reported on as Theresa May leaves stage left to leave at least 13 members of the Conservative party to fight out who will replace her. May has been a tricky month for equity investors, June may be just as tricky.