During the month of May the global equity markets (MSCI World Index) retreated from their recent gains, dropping 1.2%, but remaining up more than 7.5% for the year. In economic news, survey data showed further weakness in the manufacturing sectors, while services continue to prove robust.  Europe fell back for the month but remains the strongest region for the year so far. The United States was one of the very few regions to finish in positive territory, albeit driven by the strong performance of a handful of mega-cap tech stocks. Asian equities also fell as China’s weakness spilled over to Hong Kong and Singapore, but Japan rose in May, reflecting favorable valuation levels and higher dividends. Worries over the US debt ceiling dominated investors’ thoughts, although a deal was reached shortly after the month-end. Government bond yields generally increased through May (meaning their prices fell) but there was divergence between markets, with weaker data across the Eurozone.   
With surprisingly strong labor data that came out in May, the United States continues to show strong economy with persistant inflation. The headline unemployment rate fell to 3.4% from 3.5% in March, while inflation (consumer price index or CPI) rose 0.4% month-on-month in April. The month kicked off with the US Federal Reserve (Fed) announcing its 10th interest rate hike in just a little over a year. The 0.25% increase brought the Fed funds rate to 5.25% - the highest since August 2007. Investors were nervous in the prospect of the imminent U.S. government default, but in the end a debt-ceiling relief package was negotiated in the last minute, and narrowly avoided “the unthinkable”.
The US stock returns in May were driven largely by the strong earnings from the technology sector, as market dominance has become increasingly concentrated into the very largest stocks. Specifically, just seven names drove nearly 90% of the S&P500’s return year to date. Recent enthusiasm over AI (Artificial Intelligence) also boosted technology stocks. The monthly sector performance was significantly dispersed. Information technology stocks, led by the mega-cap techs, soared 9,5%, while economic worries and lower demand concerns caused Energy and Consumer staples stocks to drop by 9% and 6,5%, respectively. The performance of credit markets was mixed over the month, with the US underperforming the European market in both investment grade and high yield debt. The US 10-year government bond yield increased to 3.63%, while the 2-year rose to 4.40%, thus keeping the inversion in the US yield curve (an inverted yield curve is typically considered a precursor to an economic recession).
European economies began to show signs of falling inflation, with sharp declines in annual inflation rates in Germany, France, and Spain. The overall Eurozone annual inflation rate was 7.0% in April 2023. Meanwhile, core inflation (excluding the volatile food and energy prices) came down to 5.6% year on year. Eurostat data showed that food price inflation declined 1.9% to 13.5% annually, which was the first significant decline in about two years. Against this backdrop, both the Bank of England (BoE) and European Central Bank (ECB) followed the Fed by raising interest rates 0.25% each. For BoE this was a 12th consecutive rise. ECB’s rate hike was expected by the investors, with the deposit rate raising to 3.25%. Markets currently expect two further rate hikes to a terminal deposit rate of 3.75% by the end of the year. Revised figures showed that the German economy did not in fact avoide recession over the winter - after GDP for Q4 2022 fell -0.5% quarter-on-quarter, there was another decline of -0.3% in Q1 2023. So, European shares slipped in the month, after a generally strong returns for the year so far. In local currency, the pan‑European STOXX600 Index lost 3,2% All sectors fell apart from information technology which was boosted by semiconductor stocks. Germany’s 10-year government bond yield decreased slightly to 2.27%, while the UK 10-year yield saw the largest hike as it rose from 3.72% to 4.18%. For the month European high yield debt performed well, with both positive total returns and excess returns over government bonds, (high yield bonds are more speculative, with a credit rating below investment grade).
In May, the Bulgarian stock market exploded. The only BSE index that posted a small monthly loss was BG REIT (for real estate), which fell by a quarter of a percent, while the others finished strongly up. The end of the annual consolidated earnings release season and announcements of juicy dividends helped the flagship index SOFIX to add 10% to its value, and the broad BGBX40 –  nearly 6%. The best-performing domestic company during the month was financial and insurance holding Eurohold Bulgaria AD, whose price rose more than 30%, while the worst performer was the industrial radiator maker Korado-Bulgaria AD, whose stock fell nearly 17%.