Meanwhile, emerging market equities were helped by the easing of pandemic restrictions in China. The country has pursued a ‘zero covid’ strategy this year resulting in much of Shanghai being placed in lockdown. Consequently, the MSCI Emerging Market Index was up 0.1% while the MSCI China Index gained 0.8%.
The MSCI USA Index finished the period down 0.6% with the consumer staples sector being a notable casualty. This was largely driven by corporate earnings releases from some major US retailers, some of which announced reduced profit margins.
In Europe, much stronger-than-expected eurozone inflation data at the end of the month re-ignited the bond market sell-off, although European equities mostly held their ground with the MSCI Europe ex UK Index down just 0.3%.
At its May meeting, the US Federal Reserve (Fed) confirmed that in June it will begin to sell the assets it purchased under its pandemic-era quantitative easing (QE) programme, meaning that quantitative tightening (QT) will get underway. It also raised its policy rate by 0.5%, double the usual 0.25% increment.
April’s consumer price index report (released in May) showed tentative signs that US inflation may be peaking with the headline rate dipping from 8.5% to 8.3%.
Signs that inflation may be peaking, and that the subsequent rate of interest-rate increases might slow, helped US Treasury yields to fall (meaning their prices rose), while global equity markets regained their poise and rallied in the closing weeks of the month with the MSCI World Index down just 0.2%.
The Bank of England (BoE) raised UK interest rates by another 0.25%, at its May meeting, to 1%. Having been among the first of the developed market central banks to increase interest rates, the BoE has so far been unwilling to ramp up the pace of tightening, despite increasingly rampant inflation, due to a particularly weak growth outlook. Monthly UK GDP growth for March was down 0.1%.
Over the month, the ICE BofA UK Gilt Index declined 3.1%, while the ICE BofA Sterling Corporate Index also fell, down 1.6%. However, US Treasuries posted a small gain, with the ICE BofA US Treasury (sterling hedged) index nudging up 0.1%.
Note:Currency hedging of foreign investments dampens the effect of currency fluctuations on returns and reduces the volatility of your investment. Under most circumstances, we currency hedge foreign currency bond holdings except in cases where the foreign currency exposure is an explicit return-driver (eg emerging market local-currency debt exposures).