The Multi-Asset Process

May 2018 market review

May proved another in a long series of months marked by highs and lows: in the first half, we were back in record high territory and the FTSE 100 closing in on 8000; in the latter days, stocks were falling again, rocked by Italian political chaos and renewed fears of trade wars.

The UK’s blue-chip index breached 7800 for the first time during May, helped by a weaker pound, and climbed as high as 7877 before dropping back in the last days of the month. Other markets around the world showed a similar trajectory, with plenty of ups and downs despite a fairly flat month overall.

Trade war concerns continue to dominate sentiment, with the situation – and the associated impact on markets – see-sawing between relative calm and panic. Early in the month, US Treasury Secretary Steven Mnuchin reported the trade war with China was "on hold" after the world's largest economies agreed to drop tariff threats while they work on a wider trade agreement. But this optimism and progress had stalled days later with huge tariffs on steel and aluminium imports firmly back on the table and drawing criticism from the rest of the G7. At present, a trade war is feared to be just days away, with a key summit of G7 leaders scheduled for early June.

As ever, President Trump’s tweeting inflamed an already volatile situation, claiming the US has been ripped off by other countries for years on trade and pulling in the European Union and Canada. French President Emmanuel Macron apparently called Trump to tell him the tariffs were illegal but was told there is a need to "rebalance trade" with the EU.

Staying with Europe, Italy was without a functioning government for May following inconclusive elections in March, with a coalition of the populist League and Five Star parties taking power on 1 June. Both are considered eurosceptic, prompting questions about what this could mean for an EU already trying to deal with the UK’s exit as well as a recent no-confidence vote for the government in Spain.

Giuseppe Conte has been sworn in as Italy’s prime minister, accepting the president's veto of a eurosceptic economy minister. The eventual choice, Giovanni Tria, is in favour of Italy's continued membership of the single currency but the coalition has promised welfare spending and tax cuts that may contravene EU spending rules: as with so much these days, we will have to wait and see.

Elsewhere, oil prices have been a new entry on the list of key stories this month. Prices hit $80 a barrel for the first time in four years during May and, despite a drop amid trade war and Europe-inspired volatility, analysts suggest we could be back at $100 during 2018.

There are clear reasons for this rising price, with the global economy steadily improving, tax cuts in the US and central banks in Japan and Europe resisting calls to tighten policy. Supply has largely been kept in check, driven by planned Opec production curbs.

If Iran is frozen out of the global oil market following Trump’s decision to pull out of the nuclear deal, other suppliers will pick up the slack but it will take time for Opec members and Shale producers in the US to up supply. Prices are going up because traders are speculating that demand for oil will exceed supply – and for now that looks a reasonable assumption.

In the UK, meanwhile, the Bank of England kept interest rates on hold in May on the back of weaker-than-expected economic data. Although there was dissent from hawkish Monetary Policy Committee (MPC) members Ian McCafferty and Michael Saunders, the other seven voted to maintain rates at 0.5%. The MPC said it expected inflation to "fade a little faster than previously thought" and this has further reduced pressure for a hike in the short term.

Having voted against upping rates in March and warning of ‘faster and sooner’ rises back in February, many assumed a 0.25% increase was all but nailed on for May’s meeting. But governor Mark Carney highlighted “mixed data” and said he is focusing on the general path of rate rises rather than precise timing. This has seen him dubbed an "unreliable boyfriend" by critics, who claim he has failed to follow through on monetary policy guidance on multiple occasions.

Carney has also warned economists about the dangers of a disorderly Brexit, arguing that negotiations have entered the critical phase. He said the Bank is ready for Brexit whatever form it takes and has suggested the UK economy could tolerate higher inflation and retain very low rates in order to support growth.

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Monday, June 11, 2018, 1:40 PM