Stock Rally Continues Amid Inflation Fears and Geopolitical Tensions

May was marked by the continuation of geopolitical tensions in the Middle East and persistent inflationary pressures, even as optimistic statements emerged regarding US-Iran negotiations. While Brent crude oil prices fell from $114 at the end of April to around $97, they remain elevated, sustaining concerns about inflation and potential energy shocks. This situation significantly impacted bond markets throughout the month.

A notable shift occurred in market expectations regarding long-term inflation. In May, market anticipation of US five-year inflation over the next five years intensified. Similar inflationary pressures are evident in Europe, where ECB council member Isabel Schnabel indicated that a rate hike might be appropriate in June due to the current 3% inflation rate. Market expectations for the Eurozone are even more pessimistic, suggesting inflation could reach 4% by year-end. The Bank of England also anticipates escalating inflationary pressures.

The primary driver for the resurgence of inflation is attributed to the generally high levels of oil prices. A growing consensus suggests that the Federal Reserve, ECB, and the Bank of England will be compelled to maintain interest rates at elevated levels for a considerably longer period due to persistent inflation. This outlook has triggered a strong wave of sell-offs in bond markets, leading to a partial increase in yields to maturity. The yield on US 10-year government bonds climbed to nearly 4.7%, marking the highest levels in two years, reviving fears of a "higher for longer" scenario.

Despite these concerns, stock markets continued their strong upward trend, with the US S&P 500 index reaching new historical records. The primary engine of this growth was the exceptionally strong quarterly results reported by listed companies. A significant divergence persists between regions; while US companies thrived, growth in Europe was slightly weaker at +3.5%. European stocks are more sensitive to weaker domestic economic indicators and oil price uncertainties, given Europe's greater reliance on energy imports compared to the US. Within equity markets, the US technology sector once again dominated, experiencing a 13.3% surge, with semiconductors emerging as the absolute winner of the month.

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it would be appropriate to raise the reference interest rate already in June