May 2022 Global Market Commentary
Global equities recovered in May, while the global sukuk market fell in the same month. The MSCI World Islamic Index gained 1.22% month-over-month. Meanwhile, the Dow Jones Sukuk Index slightly declined by -0.03% in May.
US Treasury yields jumped and global equities tumbled in early May due to investors’ worries that aggressive central bank policies around the world might shackle growth. Fears of a recession quashed earlier enthusiasm from Federal Reserve Chair Jerome Powell’s remarks that policymakers were not considering a 75 basis point rate hike in the future. Toward the end of May, equities turned positive on bets of a less aggressive Federal Reserve, signs of peaking US inflation and COVID-19 restrictions in China being eased.
In the US, the Federal Reserve announced a 50 basis point rate hike during the May meeting and indicated that similar moves may be needed during the June and July meetings. In the first quarter earnings report, nearly 80% of S&P 500 companies reported a positive earnings per share surprise. However, with more companies issuing negative earning per share guidance for Q2, the markets seemed to be looking ahead. Investors reacted negatively and sold off US equities in mid-May, fearing that growth in earnings going forward with would suffer from rising cost pressures.
In the UK, the Bank of England raised interest rates from 0.75% to 1% to tackle spiraling inflation made worse by Russia’s war in Ukraine. The central bank forecasted inflation to rise above 10% in 2022, the highest level since 1982. The bank also warned that Britain’s economy could fall into recession in 2023. The government is facing calls to launch a fresh package of emergency financial support for households to ease the higher cost of living.
In Shanghai, authorities are easing a city-wide lockdown that began two months prior. They will also introduce policies to support the battered economy that is expected to shrink in Q2. The recovery of the Chinese economy will likely depend on COVID-19 developments, with consumers and businesses unlikely to regain confidence immediately.
Oil prices surged above US$ 115 per barrel as the European Union agreed to curb Russian crude oil imports. The war in Ukraine and sanctions from the US, the UK, and the European Union against Russia are upending the global oil supply chain.
Markets are expected to remain volatile until there is a clear picture of the Federal Reserve rate policy and its trajectory later this year. The worry from investors is that as we approach the second half of the year, the Federal Reserve is going to be aggressive in raising interest rates until the US economy risks falling into a recession.