Will they or won’t they?

Will they or won’t they?

  • The House hurdle passed, but political divides grow 
  • The Fed’s possible holding pattern?
  • Europe’s financial market stability questioned
  • Crypto’s ties with Wall Street
  • Key events in May

Markets in May

Early May saw equities slide due to uncertainty around the US debt ceiling and the risk of default and continuing concerns around banking sector stability and with some turmoil hitting regional banks in the US. However, tech stocks came to the rescue with the firms like Nvidia surging in value due to the growth narrative around AI. The concentration in good performance is focused only on a few tech stocks including other mega caps like Apple, which has some investors worried about the sustainability of the market. Concerns about rising stresses in the banking sector have caused some worries that liquidity tightening could have an adverse effect on growth in the months ahead.

Therefore the question really is whether the US will be able to avoid a recession later this year and this very much depends on two things. Persistently elevated inflation, a tight labour market that indicates continuing higher interest rates and stringent credit conditions will constrain private sector spending power as interest-rate sensitive sectors come under increasing stress. However, the more immediate cause of a recession would be the failure to pass the debt ceiling bill this week as the deadline for when the US will default is only four days away on 5 June. Real GDP growth came in at a rather soft 1.3% in Q1 despite relatively good consumer spending experiencing 3.8% growth. The big concern remains the pullback in inventories which may indicate falling demand. Consumer Confidence fell in May to 102.3, down from an upwardly revised 103.7 in April. The Federal Reserve will be looking closely at May’s CPI data due on 13 June. The Fed is increasingly expected to pause rate rises in June, but may, depending on data, resume in July as a still tight labour market, with the number of job vacancies unexpectedly increasing by 358 thousand to reach 10.1 million in April 2023.

The cost of insuring exposure to US sovereign debt continued to rise in May, with 5 year CDS values changing based on discussions around the debt ceiling and market concerns that the government could default on its debt. According to Worldgovernmentbonds.com, it was -33.16% during the last week as an agreement seemed to be reached that would be put forward for a vote, -12.11% during the last month,+126.26% during the last year. 

The European stock markets fell in May although European equities remain cheaper than their US peers. Europe has also benefited from falling inflation and improving consumer sentiment despite the high probability of rising interest rates. According to the Refinitiv Stoxx 600 Earnings Dashboard, first quarter earnings are expected to increase 9.6% from Q1 2022 and first quarter revenue is expected to increase 0.9% from Q1 2022. Of the 280 companies in the STOXX 600 that have reported earnings to date for Q1 2023, 66.1% reported results exceeding analyst estimates. In a typical quarter 53% beat analyst EPS estimates.

Global Market Indices

S&P 500
 -0.86% MTD and +9.53% YTD
Nasdaq 100
 +7.63MTD and +30.32% YTD
Dow Jones Industrial Average
 -3.10MTD and -0.32% YTD
NYSE Composite 
-4.24MTD and -1.96% YTD

Stoxx 600 
-3.19MTD and +6.22% YTD
 -1.62MTD and +12.50YTD
CAC 40
 -5.24MTD and +9.65% YTD
FTSE 100
 -5.39% MTD and -0.08% YTD
IBEX 35 
-2.06MTD and +9.98% YTD
-3.79% MTD and +9.89% YTD

MSCI World Index 
-0.40% MTD and +7.78% YTD
Hang Seng 
-8.35% MTD and -7.82% YTD

Corporate reporting season

According to Refinitiv I/B/E/S data as of 26 May, 23Q1 Y/Y earnings are expected to be -0.1%. Excluding the energy sector, the Y/Y earnings estimate is -1.8%. Of the 485 companies in the S&P 500 that reported earnings by that date for 23Q1, 77.1% reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 73.5%. As noted by Factset, the best performing sector has been Consumer discretionary, with earnings growth at 55%.

During the latter part of May in particular, energy stocks continued to underperform as concerns about Chinese demand and a strengthening dollar worried investors. Financials, particularly banks, also worried investors due to fears that reserves may be drained by rebuilding of the Treasury General Account with the Federal Reserve. During May the best performers were utilities, precious metals like gold, and large cap pharma stocks, while some of the worst performers were within the retail/apparel sector and industrial metals sector. 

Mega cap stocks had a positive May with Amazon, Microsoft, Apple, Meta Platforms, Alphabet, Nvidia, and Tesla all up.

Energy stocks had a mixed month due to concerns about falling demand and rising US supplies. Energy Fuels were up, while Apa Corp (US), Phillips 66, Marathon Petroleum, Baker Hughes Company, Occidental Petroleum Corporation, BP, Shell, Chevron, ExxonMobil, and Halliburton were all down.

Materials and Mining stocks had a mixed May as lithium and copper prices fell. This hit mining stocks with Freeport-McMoRan, Newmont Mining, Nucor Corporation and Sibanye Stillwater all down. Materials stocks were mixed with Albemarle Corporation up, Yara International, CF Industries Holdings, Mosaic, Celanese Corporation all down.


Oil was hit in May by growing concerns over weak Chinese demand as official government data reported factory activity contracted in May to the lowest in five months, while service sector activity expanded at the slowest pace in four months. It was also hit by rising US crude oil inventories as well as uncertainty over US debt ceiling negotiations. Sentiment is likely to improve if the debt bill passes the Senate after passing the House on 31 May but may be swayed by the results of the 4 June OPEC+ meeting. Investors will also be looking for further signals that the Fed may pause its rate hikes in June, although given the continuing tightness in the labour market, expectations of further rate rises are increasing. This would result in a higher USD which will negatively affect the price of oil. However, a potential upside for oil in June may come from news that the Caixin/S&P Global China manufacturing purchasing managers' index (PMI) showed a rise to 50.9 in May from 49.5 in April, which may help lessen concerns about Chinese industrial demand. 

As noted by Bloomberg news, the commodity crunch that began last year is now reversing, with energy prices, metals prices and crop prices all falling as worries over rising recession risk, Europe’s industrial slump and weaker than expected Chinese demand hit these sectors. 

Although metals had a difficult May with copper, lithium and aluminium all seeing some falls, precious metals were benefiting as it appeared throughout most of the month of May that the Fed would hit pause. Gold futures rose to $1,981.90 an ounce by the end of May. However, given the tightness of the US labour market, concerns over rising wages, and still high core inflation, the Fed is looking increasingly likely to raise rates again in July, especially if the debt ceiling bill is passed by the Senate and global financial disaster is avoided.


The dollar strengthened in May to a two month high despite market jitters around potential US debt default because the USD remains the world’s safe haven asset. Weaker Chinese data has contributed to USD strengthening in May. The EUR -0.19% YTD against the US dollar, the GBP is +2.82% against the US dollar. Sterling hit a 5-1/2 month high against the Euro on 30 May with the Euro dropping to as low as 86.27 pence, its weakest since 15 December 2022. The euro is down around 1.5% against the pound in May, which is the biggest monthly decline since October.


Bitcoin -7.62% MTD and +63.60%YTD
 -1.62% MTD and +55.72%YTD

Bitcoin posted its first monthly loss for 2023 in May while volatility for Bitcoin and other cryptocurrencies has dropped significantly in the past 30 days. According to Analyticinsights.net, the drop in crypto valuations may be due to a variety of factors including the rising interest rate environment and the geopolitical risk environment. However, increasing regulatory oversight may also be a factor. In the EU, the Markets in Crypto-Assets (MiCA) framework, which creates a unified regulatory framework across Europe, was signed into law, the UAE Central Bank announced the introduction of new guidance concerning anti-money laundering (AML) measures for virtual assets, cryptocurrencies, and NFTs, and Hong Kong revealed its crypto trading policy, which would allow mainland Chinese to participate in the crypto market. 

Note: As of 5pm EDT 31 May 2023

Fixed Income

US Treasuries to 3.63%.
German bunds to 2.28%. 

UK Gilts to 4.18%.

Yields have had a tricky May as US policymakers were increasingly hawkish towards the end of May as it became clear that inflation is getting stickier. US yields were also hit by ratings agencies warnings that no deal on the debt ceiling would place the US’ AAA rating under threat. UK yields continued to rise on the news that inflation, although falling, was still above BoE expectations, coming at 8.7% in April. European bond yields are likely to move higher in June as the notes from May’s meeting revealed that most of the voting members wanted a higher rate hike but agreed to a smaller 25 bps hike on the basis that “further interest rate increase would be warranted.” This means higher rates in June and probably July despite the fall in inflation in April.

Global macro updates

Debt ceiling agreement to be taken to the wire. The US Senate will review a bill today to lift the government's $31.4 trillion debt ceiling otherwise the US will be unable to pay its bills starting on 5 June based on calculations by the US Treasury. If it passes the bill, it will send it to President Joe Biden to sign, averting a catastrophic default. The US House of Representatives passed the bill to suspend the $31.4 trillion debt ceiling on Wednesday, with majority support from both Democrats and Republicans. The Republican-controlled House voted 314-117 to send the legislation to the Senate. "This agreement is good news for the American people and the American economy," Biden said after the House vote. Adding, "I urge the Senate to pass it as quickly as possible so that I can sign it into law." The bill is a compromise between Biden and House Speaker Kevin McCarthy. It drew opposition from 71 hardline Republicans, thus, as noted by The Hill, highlighting the tenuous hold that Speaker McCarthy has over other House Republicans as many of the same conservatives who had opposed his Speakership in January reemerged on Wednesday to send a clear message that they think McCarthy betrayed his promises to hold the line on budget issues. The proposed bill suspends the federal government's borrowing limit through Jan. 1, 2025 and allows Biden and Congress to set aside the politically risky issue until after the November 2024 presidential election. The bill caps some government spending over the next two years, increases work requirements for some aid programmes, and claws back unused Covid-19 funds, points which many Democrats had previously said were unacceptable. The nonpartisan Congressional Budget Office (CBO) said the bill would lead to $1.5 trillion in savings over a decade. That is below the $4.8 trillion in savings that Republicans aimed for in a prior bill they tried to pass in April and below the $3 trillion that President Biden's proposed budget would have reduced over that time through new taxes. 

Europe’s financial market stability questioned. The ECB said that financial markets will be vulnerable to negative shocks as it continues the fight against inflation, with real estate among the sectors most at risk. The May 2023 Financial Stability Review said the outlook for euro area financial stability remains fragile, in the context of recent banking stress outside the currency union and that higher funding costs and lower asset quality may weight on profitability. The report stated that financial markets are vulnerable to disorderly adjustments, given investment fund vulnerabilities, stretched valuations, high volatility and low liquidity. Although it determined that bank resilience in a higher interest rate environment was not a concern for the euro area, the ECB said it is “possible that these events could lead to a reassessment of the profitability and liquidity outlooks for euro area banks.” ECB Vice President Luis de Guindos said that “Tighter financing conditions to forcefully address high inflation have contributed to a reappraisal of the economic outlook and to a reversal of overly compressed asset-price risk premia.” He also said that, “As financial conditions normalise, this may expose fragilities and fault lines in the financial system.”

Crypto’s Wall Street Expansion. According to the Financial Times, Standard Chartered, Nomura and Charles Schwab are among the traditional financial institutions that are creating or backing new, separate crypto companies, including exchange and custody groups that can handle digital tokens such as bitcoin and ether. Broker Charles Schwab and market makers Citadel Securities and Virtu Financial are among the groups backing EDX Markets, while UK lender Standard Chartered has supported exchange Zodia Markets and custody house Zodia Custody. BNY Mellon and Fidelity already operate separate crypto custody divisions. Meanwhile, the Nasdaq is awaiting regulatory approval for its service. The fact that more established financial institutions are looking to engage in the crypto trading space will likely be supported by the global standard setter for securities markets, which published guidelines on 23 May on how to regulate crypto assets. These guidelines were developed after a number of failures by crypto exchanges, notably FTX, to protect investors and to credibly deter non-compliant actors. The 18-point plan covers areas including conflicts of interest, disclosure rules and governance. 

Key events in June

2-3 June 2023 Foreign ministers of BRICS meeting. The BRICS members, Brazil, Russia, India, China, and South Africa, will meet in Cape Town (South Africa) to discuss enlarging the bloc. According to Bloomberg news, Thirteen countries have formally asked to join and another six have asked informally. The conversation to expand was initiated by China when it was chair in 2022. China’s economy is more than twice the size of all the four other BRICS members combined and therefore members are leary of their power being dissipated by Chinese allies. Saudi Arabia and Iran are two of the countries that have formally asked to join, while Argentina, the United Arab Emirates, Algeria, Egypt, Nigeria, Mexico, Bahrain and Indonesia have shown an interest in joining.

2-4 June 2023 Shangri-La Dialogue. The Shangri-La Dialogue will provide a forum to discuss critical regional security issues.

4 June 2023. OPEC+ meeting. OPEC+ will discuss whether additional oil production cuts should be implemented. It announced a surprise output cut in early April of around 1.16 million barrels per day, fuelling a rise in prices.

13-14 June 2023 US Federal Reserve Monetary Policy meeting. Fed Governor and vice chair nominee Philip Jefferson said any decision to hold rates steady should not be viewed as the end of the tightening cycle. "Skipping a rate hike at a coming meeting would allow the (Federal Open Market) Committee to see more data before making decisions about the extent of additional policy firming," Jefferson said at a financial stability conference in Washington. Philadelphia Fed President Patrick Harker had said, "I am in the camp increasingly coming into this meeting thinking that we really should skip," though job data due on Friday about "may change my mind.” However, Cleveland Fed President Loretta Meester doesn’t see a need to pause. It is clear that a persistently tight labour market is contributing to fears that wage growth is creating stickier inflation. Markets are now expecting the Fed to pause in June as they evaluate the data and the effects of the debt ceiling negotiations on credit markets, with an expected resumption of rate hikes in July. 

15 June 2023 ECB meeting and monetary policy decision. The ECB is expected to raise rates again at the June meeting by 25 basis points. Although headline Inflation eased to 6.1% in May from 7.0% in April with core inflation, which excludes volatile food and fuel prices, falling to 5.3% from 5.6%. The ECB has raised base rates by a combined 375 basis points to 3.25% over the past year. Despite falling energy prices, underlying price pressures have built throughout 2023 and the ECB appears committed to more rate hikes. ECB Vice President Luis de Guindos said earlier Wednesday in Frankfurt, “I think that we are on the correct trajectory and we have to look very carefully at the evolution of core inflation.” His ECB colleague Madis Muller said there’ll probably be more than one additional quarter-point hike, warning that underlying inflation “unfortunately shows no signs of slowing yet.”

22 June 2023 Bank of England Monetary Policy meeting and monetary policy report. The BoE raised interest rates 12 times in a row and is highly likely to raise them again by 25 basis points in the June meeting. Headline inflation is still running well above target at 8.7% with core running at 6.8%, a rise from March’s 6.2%. BoE policymakers will be looking at May's CPI data on 21 June. Markets have priced in as many as four more BoE hikes but that is unlikely as such tight credit conditions would probably tip the UK into recession. 

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