May was another good month for risk assets as the COVID-19 infection rate fell across most of the developed world.
Economic activity over the past month suggests that the second quarter will be worse than the first but investors are looking ahead to a possible recovery.
Central banks and governments have so far helped cushion the blow to the global economy, credit markets are open, and companies are able to refinance at reasonable rates. So far there has been no evidence of a second wave of infections.
There was a broad-based rise across equity markets, but the UK was a notable laggard, up ‘only’ 3.1% compared to the 7.3% and 8.0% rises in the US and Europe ex UK, respectively.
Sterling weakness was again in evidence over the month, with relatively high infection rates, speculation about a possible cut in interest rates and a 2.0% fall in quarter-onquarter GDP all contributory factors.
Credit markets were strong, with high yield spreads narrowing sharply and the asset class kept pace with equities this month. Credit spreads are now approaching their long run averages and are further evidence of the strength of investor sentiment.
Sovereign bond yields rose marginally in the month, leading to small losses but still suggest a very different economic backdrop to that suggested by the performance of risk assets.
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