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Archinomics Monthly - May 2022

2 years ago



Global equities initially fell, hurt by fears over the outlook for the global economy, before recovering in the closing days of the month. In the US, the S&P 500 Index briefly entered a bear market, but later rallied to close the month flat (0.0%), although the tech-heavy Nasdaq dropped 2.1%. In Europe, UK equities (FTSE 100) gained 0.8%, while eurozone stocks were mixed – German equities (DAX 30) rallied 2.1% but French shares (CAC 40) eased 1.0%. Chinese stocks also rallied (CSI 300 + 1.9%), helped by news that Shanghai’s two-month lockdown will start to be lifted in early June.


Global bonds initially sold off sharply on concerns that central banks would need to ramp up the pace of their monetary tightening. The yield on the 10 year Treasury bond reached 3.2%, its highest level since late 2018, while the 10 year German Bund yield approached 1.2% for the first time since 2014. US bonds subsequently rallied as the US Federal Reserve discounted a 75 basis point rise in rates, closing the month with positive returns (10 year US Treasury +0.6%). However, European bond returns were negative as yields remained elevated (10 year German Bund -1.4%). In the credit markets, spreads over sovereign debt initially widened, but snapped back as equity markets recovered towards the month end.


Speculation that the European Central Bank would start to raise interest rates as soon as July boosted the euro. The single currency appreciated 1.8% against the US dollar, 1.6% against the British pound, and 0.9% against the Japanese yen.


Oil prices rallied to a two month high, with Brent crude rising 12.3% to $122.80 a barrel, as OPEC appeared reluctant to step up increases in supply. Wheat prices also appreciated, as Russia refused to allow stores of Ukrainian grain to be shipped unless the West relaxes sanctions. Elsewhere, April’s decline in raw material prices was largely stemmed by hopes that China was about to ease lockdowns in key cities. 

Market Volatility

Market volatility

Volatility declined over May as fears of a 75 basis point increase from the US Federal Reserve abated. The Vix index fell 21.6% over the month to close at 26.2.

Responsible investing

The European Commission announced a €300 billion REPowerEU plan, aimed at ending the EU’s dependence on Russian fossil fuels and tackling the climate crisis through a green transformation. After much discussion, the EU banned the majority of Russian oil imports, albeit with temporary exceptions for pipeline deliveries for Hungary, Slovakia and the Czech Republic. Several European governments, including the UK, announced windfall taxes to help households offset a steep rise in energy costs.


The US Federal Reserve (Fed) accelerated its pace of rate rises, raising the federal funds rate by 50 basis points, the first move of that magnitude since 2000, and indicating it would hike rates by the same amount in both June and July. Fed chair Jay Powell suggested that “some pain” may be needed to bring US inflation back to its 2% target, raising the prospect of a brief US recession.

The Bank of England increased the base rate to 1.0%, its highest level since 2009. With the UK economy at a standstill, as households face a cost-of-living crisis, the Bank indicated that a recession was likely this year and that inflation could reach 10% in the summer.

The European Central Bank (ECB) came under rising pressure to exit the negative interest rate policy it has held since 2014, with the first rate rise expected as early as July. While ECB president Christine Lagarde has indicated that any rate rises will be gradual, other ECB policymakers are pushing for swifter increases.


on the

The European Central Bank (ECB) faces a dilemma. With inflation running at four times its official 2% target (8.1% in May), the ECB needs to raise interest rates but it has committed to end its bond-buying programme first. Calls are mounting for a 50 basis point increase in July.

There are tentative signs that US inflation may have peaked, with both headline consumer prices and the core Personal Consumption Expenditure Index – the Fed’s preferred measure of inflation – easing slightly in April. May’s data will be scrutinised to see whether this trend continues.

As the war in Ukraine enters its fourth month, Russia is slowly achieving control of the contested Donbas region. Russia may be more likely to enter into negotiations if it achieves its stated aims, especially given that the recent pan-European pact to ban the insurance of ships carrying Russian oil is likely to further knock its economy. The question is, would Ukraine do the same?


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