Market sentiment declined in May as mixed economic data from the US and China, along with ongoing debt ceiling negotiations, prompted investors to reduce their exposure to risky assets. Currently, markets are trading with little conviction and are in search of a catalyst that can decisively push them in a specific direction.
The US regional bank crisis has persisted, with deposit flight showing no signs of slowing down as funds move away from risky regional banks into higher-yielding money market funds and safer national banks. While many of the issues with regional banks are idiosyncratic, if interest rates continue to remain at such elevated levels, further vulnerabilities will emerge.
On the data front, the US labour market continues to exhibit resilience, as indicated by the latest nonfarm payrolls report which revealed the addition of 253 000 jobs in April. Additionally, the unemployment rate declined from 3.5% to 3.4%, surpassing expectations for an increase to 3.6%. Inflation also experienced a decline, with headline CPI dropping to 4.9% in April, while core CPI fell to 5.5%.
In contrast to China’s uncertain recovery, Japan continues to make progress, as indicated by the latest GDP data which revealed the economy expanded at an annualised pace of 1.6% in the first quarter. Japanese equities have experienced a strong rally year-to-date, as investors recognised their attractive valuations and growth potential in light of the Bank of Japan’s accommodative policy. This upward trend has persisted into May, with the Nikkei 225 index currently up 4.3%.