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After falling and then rebounding dramatically in April, equity markets continued their recovery in May, this time supported mainly by easing trade tensions between China and the U.S. The rally in May across global equity markets was another example of how quickly markets can snap back after a period of weakness. In the end, virtually all equity regions were largely positive for the month.
Global bonds, however, were in the proverbial doghouse for the month as yields increased across the world led by the U.S.Treasuries. While U.S. Treasury yields were influenced by higher inflation expectations due to the Trump administration’s tariff policy, the main driver was the administration’s signature tax legislation which could potentially add trillions to the U.S. deficit. If that were to happen, the United States will have to issue more Treasury bills to finance its expenditure, and investors are likely to demand a higher yield.
Summer looks set to be volatile in the financial markets, with the U.S. administration negotiating both trade relations with its main partners and its tax plan with the Senate. However, some parameters are starting to fall into place.
On the tariff front, although anything can happen, the realignment of the Trump administration brings us closer to levels that are more tolerable for the economy. Besides, in its current form, the budget plan appears to be broadly inline with election promises and is, therefore, not set to significantly alter the trajectory of the budget deficit which remains abnormally high.
Ultimately, the fate of financial markets remains largely dependent on the measures taken by the Federal Reserve once all these changes settle. With economic data still largely positive, it can afford to wait, and I believe they will.
Overall, aside from the daily noise, the resilience of the economy and markets suggests that equities could remain on their upward trend relative to bonds, confounding widespread investor pessimism as has often been the case in the past.
Click below to read the full edition of ‘MonthlyMarket Perspectives’ where I dive into and recap financial markets in May and provide some insight of what lies ahead for investors.
Thanks for Reading. AP
