Global Asset Allocation Team Market Update – June 2023
Sentiment deteriorated and financial markets relapsed in May on the back of a hawkish re-pricing of central bank policy expectations, a sluggish global growth landscape, and debt ceiling jitters in the United States. However, the end of the month brought some good news on the latter. After weeks of negotiations, President Biden and Speaker McCarthy reached a deal to suspend the debt ceiling and averted a US default. Still, while investors breathed a sigh of relief in response, focus has swiftly reverted back to the precarious environment of persistent inflation and looming recession risks.
Global equity markets generated negative results in May. Regionally speaking, the results were mixed. On the one hand, the tech-heavy S&P 500 managed to buck the global trend and eked out a positive (0.3%) return thanks to the profound rally in mega cap tech stocks that has put the S&P 500 on the verge of a bull market. The Nasdaq 100 gained 7.6%. Elsewhere, declines were fairly widespread. The S&P/TSX fell by 5.2%, the MSCI EAFE declined 4.8%, and the MSCI gauge of emerging market stocks was down by 1.9%.
Fixed income markets also posted negative results last month. Bond yields pushed higher as investors revised their expectations for a pivot towards rate cuts in response to continued signs of economic resiliency that have complicated central banks’ quest to tame inflation. Markets are now fully-priced for an additional 25 basis point rate hike from both the Federal Reserve and the Bank of Canada this summer and have all but wiped out calls for rate cuts in the back half of 2023. Notably, at the start of May, expectations were for the Federal Reserve to cut rates below current levels to just above 4.5% by the end of the year. However, traders now expect the fed funds rate to end 2023 around its current level. Similar moves were seen in Canada following upside surprises to the latest growth and inflation results, which prompted traders to bump-up terminal Bank of Canada rate pricing. The FTSE Canada Bond Universe fell by 1.7%, while the Barclays US Aggregate Bond Index shed 1.1%.
In currency markets, the US dollar strengthened alongside wagers for a higher fed funds rate, which sent both treasury yields and the greenback soaring higher. Rate differentials between the United States and the rest of the world widened in response and the greenback was stronger against all of its Group-of-10 peers last month.
Commodity markets saw some widespread weakness last month. Oil stumbled lower as concerns about wavering global demand dominated the outlook, while copper slid to its lowest since November following data releases that showed an underwhelming post-Covid recovery in top-consuming China. Finally, gold retreated as late-month progress towards a resolution of the debt ceiling debacle eroded demand for the safe haven metal – while speculation for additional tightening from the Federal Reserve lifted treasury yields and reduced the allure of the non-interest-bearing precious metal.