Defying the “sell in May and go away” adage
- The Fed highlighted its commitment to hold rates near zero for the foreseeable future stressing that inflation pressures should prove temporary. At the same time, central banks in some other countries appears likely to move more quickly than the Fed to let their interest rate rise. Much of the ultra-easy monetary policy will depend on inflation, consumption, and labour market conditions.
- While the U.S. is showing progress towards its fight against COVID-19, this is in contrast with the soaring COVID-19 cases in developing economies. Although developing economies valuations remain attractive, they are offset by China’s tightening and regulatory action and renewed virus outbreaks elsewhere in Asia. This put the future of complete reopening as well as the revival of international tourism on which many economies rely into doubt.
For the month of May, the global economic recovery continued with both equities and credits having rallied strongly. Following another strong month of returns, global equity indices continue to trade at a substantial discount vis-à-vis U.S. equities. Also, gold enjoyed a wonderful May having played a crucial role as an inflation-hedging asset with investors moved to price in inflation fears and lower US treasury yield.
Bond yields were mostly unchanged while credit spreads are close to their tightest levels relative to history with long-term US government bond yields dropping to the lowest level since early May in response to rising inflation and growth expectations. Nevertheless, we continue to believe breakeven inflation rates will move higher and momentum with the economic recovery will be a headwind for the asset class. Breakeven inflation rates represent measures of expected inflation.
Elsewhere in cryptocurrencies, concerns over the potential for tighter cryptocurrency regulation in the U.S., China, and elsewhere weighed on the price of bitcoin, which dropped more than 40% for the month to around $36,000. As recently as mid-April, bitcoin was trading above $60,000.
After the positive sentiment we have experienced in May, one wonders whether we are going to have another positive month for capital markets and challenging the “sell in May and go away” axiom?
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