The benign conditions that have prevailed in markets through the past six months continued into May, with most risk assets producing positive returns. Equity markets again produced the best returns, led by the UK, Europe (especially peripheral markets) and Asia, but bond markets also made solid progress, as yields drifted lower and credit benefitted from a favourable corporate backdrop. Perhaps the most notable features, however, were a further slide in the US dollar, which fell 2.2% in May on a trade weighted basis, taking its fall to 6.1% from its early January peak and reversing all of the post election surge; as well as a further drop in the oil price in the face of stubbornly high global inventory levels and evidence of surging oil shale production in the US. Also notable was the continuation of extraordinarily low levels of volatility across markets, with the VIX ‘fear’ index hovering at ten year lows, punctuated only very briefly in May by concerns that the Russia/Trump scandal could lead to a further weakening of the President and his ability to implement some of his reflationary and business friendly policies and even lead to his impeachment.

In another good month for risk assets generally the pattern of performance and market leadership has shifted significantly. Following Donald Trump’s election victory in November the US equity market led the world up sharply, with the ‘reflation trade’ accounting for much of the rise. However growing evidence that winning Congressional approval for big policy initiatives such as tax cuts and reforms, and huge spending on infrastructure will be very difficult has meant the US market has stalled. Although the S&P 500 returned 1.0% in April it has traded sideways for two months. At the same time the USD has weakened against all major currencies on a trade weighted basis.

Despite a mid-month wobble in the US equity market, it was another benign month overall for equity markets and most risk assets made further upward progress, continuing the pattern of performance since Trump’s election success. Volatility remained remarkably low, and equities again outperformed bonds. The most notable moves included a change in leadership within equity markets, with Europe meaningfully outperforming the US, credit marginally outperforming sovereign bonds (which posted flat or negative returns), and a renewed slide in the US dollar against most currencies, leaving its trade weighted index down by 1.8% year-to-date. Despite further evidence of strengthening global growth, commodity markets were generally weak, notably the price of WTI oil declined by 6.3% over the month. A combination of accelerating growth and a weaker dollar helped emerging markets to another strong month, leaving them as the best performing equity market year-to-date (posting a total return of 11.4%).