The stock markets continued to rise last month - accompanied by a temporary increase in volatility. Gains were recorded for most regions and sectors. Technology stocks and the Japanese stock market closed mixed. The fourth wave of infections and the additionally more restrictive Chinese monetary policy are likely to cause restraint in Japan as well. As recently as May, Japan had to adopt new restrictions to combat the pandemic. Progress on vaccination is very slow. In the USA, the Democrats are currently negotiating the planned infrastructure program, which the Republican Party is only likely to accept in a significantly reduced form. Between the investment program proposed by Joe Biden and what Congress will finally approve, there will probably be "worlds" in the end. The economic data continue to point upward and the U.S. Federal Reserve continues to be very expansionary. Meanwhile, the ECB seems to be already thinking about a tightening of monetary policy. This was reflected in a continued weak USD. The month of May has been generally quiet on the surface, while the solid corporate earnings reporting season, accompanied by good macroeconomic data, was coming to an end. Crypto markets saw disproportionately more volatility. Bitcoin, Ether and other coins temporarily lost around 50-60% from the year's highs. This was triggered by the Chinese banning transactions with Bitcoin and other cryptocurrencies. The US Treasury Secretary Janet Yellen announced that a capital gains tax on cryptocurrencies of up to 80% is being considered.
European markets were the clear winners among the main stock markets. However, new highs were only reached by a few indices. The SMI strengthened above the 11,000 point mark, reaching a new all-time high. Recently, this was made possible mainly with the help of the lagging defensive heavyweights such as Roche and Nestlé. The DAX index gained 1.9%, but was unable to maintain the annual highs reached in the meantime and has been marching sideways for almost two months now. The Nikkei 225 lost due to the aforementioned reasons in the short term and closed the month virtually unchanged with +0.2%.
Investor consensus currently continues to lean toward a stronger "inflation fear" which, with the current circumstances of supply constraints and commodity shortages, may well persist for some time. In the longer term, we believe that deflationary forces (debt, demographics and, at best, globalization) are likely to thwart an overly inflationary environment. Despite surprising inflation data, interest rates in the U.S.A. only moved sideways and there were no significant increases in Europe.
The commodity rally lost some momentum in May. China intervened verbally against the strong increases in industrial metals. Iron ore and steel then lost significantly on a monthly basis. Gold advanced 7.8% and exceeded the psychological 1900 mark (see FOCUS). At the same time, the U.S. Dollar Index declined 1.6%.
The outlook must continue to be defined somewhat unemotionally, despite (or primarily because of) the virtually perfect reality for the stock markets. The economy is humming and corporate profits are growing solidly. However, global equity markets are already reflecting this. Accompanied by short-term heightened volatility, many major indices have been trending sideways for several weeks. Rising inflation and the associated fear of global monetary policy curbs are currently giving investors a reason to exercise restraint. In the coming months, central banks will probably have to cautiously continue to prepare investors for a throttling of ultra-expansive monetary policy in the not too distant future, or else they will continue to stick to the storyline of temporarily overshooting inflation despite very good data. The latter could be imputed to the U.S. Federal Reserve in particular, which is currently proceeding very cautiously and trying to dispel any doubts of a premature tightening of its policy, having already panicked the markets in 2018 due to excessively tight monetary policy. Markets could see a reset regardless of the central banks' message, because if the FED continues to downplay inflation, fears of overshooting inflation will take over, and on the other hand, monetary policy throttling is just as rarely welcome to investors. Central banks may have a difficult balancing act to strike in the second half of the year. All in all, we currently consider the risk-reward ratio to be balanced in view of the positive growth outlook coupled with high valuations and expectations. We intend to increase the equity allocation when opportunities become more favorable and remain somewhat defensively positioned in the short term for tactical reasons.