May was marked by the negotiations on raising the US debt ceiling, without which a default of the United States with disastrous economic consequences could not be avoided - however, an agreement in this respect is now likely. On the interest rate side, the US Federal Reserve still seems to be divided on whether to raise rates further or pause them for the time being. However, the market is already pricing in another rate hike for July and is expecting only a slightly lower level of key interest rates at the end of the year - in contrast to several rate cuts for the current year, which the market was expecting just over two months ago. Whether and how far interest rates will rise remains difficult to project - but the steep rate hikes we have seen in most regions in recent months have often led to an economic slowdown. Various leading indicators, such as the Conference Board US Leading Indicator, have been pointing to this for some time.
The performance of the stock markets was mixed in May. While the IT (+8.2%) and communications (+3.5%) sectors performed positively, the other sectors ended the month unchanged to strongly negative. The leading stock markets in Europe all lost between 1.6% and 5.4% in the month under review. The SMI lost about 1.9% due to the weakness of the index heavyweights Nestlé (-5.8%) and Novartis (-4.4%). In the US, the Dow Jones was 3.2% lower, practically unchanged since the beginning of the year. The S&P 500 is unchanged on Monday, while the technology-heavy Nasdaq 100 leads the gainers' table with 7.7%, mainly due to high growth expectations around the topic of artificial intelligence. These divergences are just as evident below the index surface - market breadth is low. A handful of technology heavyweights were able to drive the indices higher. Among them is the chip and software company NVIDIA, which recently published solid quarterly figures and a significantly higher revenue outlook thanks to strong demand from data centres. The company reached a market capitalisation of one trillion USD this week, ranking fifth among the world's most valuable companies. The S&P 500 Equal Weight Index, in which all 500 index constituents are equally weighted at 0.2%, is up just 0.2% year-to-date only when dividends are taken into account. Other benchmarks, such as the number of stocks trading higher than the moving average prices of the past 200 days, have also declined. Various signs of internal market weakness continue to make us cautious.
Yield levels fell in Europe in May, with the exception of the UK, while yields rose in the United States and Canada, as well as in Asia. Yield curves are still clearly inverted. The yield differential in the US between the three-month Treasury bond and ten-year US government bonds is -1.8%. The debt ceiling negotiations caused sharp increases in yields on the US money market. The yield on the 4-month US Treasury bond maturing on 6 June briefly rose from 5.2% to over 6.6%. As mentioned at the beginning, hopes of interest rate cuts in the USA have now faded and a rate hike is expected by July. Inflation expectations have also recently risen again, but remain well anchored. Given that the ECB Governing Council continues to argue for multiple rate hikes, the likelihood of a monetary policy mistake is increasing. Especially if growth in Europe and consumer confidence weaken.
Increased interest rate expectations for the US and the foreseeable passage of the compromise to avert a default in the Senate and Congress helped the trade-weighted USD to strengthen. The EUR, on the other hand, continues to be weak against the major currencies. Oil prices lost 9.2% (Brent) and 11.1% (WTI) in May. Precious metal prices also fell significantly in some cases. Silver is trading 5.7% cheaper than in the previous month and gold is losing 1.8%.
So far, we have to note that our scenario of an unfavourable economic environment with high inflation has accentuated. In the first quarter of this year, Germany's GDP declined for the second time in a row at -0.3%, which corresponds to a technical recession. Although sales and profits in Europe rose on an aggregate basis, profits in the US declined for the second quarter in a row at -2.7%. Historically, European profit development follows that of the US with a lag of two to three quarters. China, an important trading partner for Europe, surprised with negative economic data - the reopening effect from the beginning of the year seems to have fizzled out. Money supply growth has been falling for some time and is already negative in the USA (see FOCUS). Higher financing costs are increasingly manifesting themselves in tighter lending and various leading indicators are signalling an unfavourable environment. The services sector, on the other hand, continues to benefit from a catch-up effect since the pandemic and is now the Achilles heel for growth should manufacturing fail to recover, which we expect to happen. In addition, the seven most valuable companies in the MSCI World Index have been the main drivers of price movements since the beginning of the year. They are all US companies (in descending order of market capitalisation: Apple, Microsoft, Amazon, NVIDIA, Alphabet, Meta Platforms, followed by Tesla). They account for just under 17% of the world equity market and illustrate the single-mindedness of price movements in the US and the world equity index. The narrow equity breadth underscores that the rally is fraught with risk. We expect growth to weaken due to falling money supply, tighter credit, higher financing costs and structurally higher prices. Stimulus in China is unlikely to materialise and thus growth will not take an immediate, unexpectedly positive turn. As a result, growth stimuli for Europe will also be absent, while profits are likely to face headwinds in the foreseeable future. We consider the environment unfavourable for risk assets and remain defensively positioned.