Market Key Points
- Global markets extended their recovery in May.
- Trade war de-escalation reduced global recession fears and led to a broad-based rally back into risk assets.
- US markets outperformed in May, rebounding from the underperformance in April.
Australian equities
The S&P ASX 200 Accumulation Index continued to rally in May, up 4.2% on the back of the 3.6% increase in April. Markets continued to be buoyed by a de-escalation in US-China trade relations, with both nations decreasing tariffs substantially for 90 days as they negotiate. All eleven sectors on the ASX posted positive returns in May, led by Information Technology (+19.8%), Energy (+8.6%), Communications (+5.5%), and Financials (+5.1%). Defensive sectors underperformed, with Utilities (+0.3%), Consumer Staples (+1.2%), and Health Care (+1.6%) lagging the broader market rally.
Life360 Inc (360) gained 51.9% and was the strongest performer in the S&P/ASX200 index in May, following a strong 1Q25 update, with revenue and EBITDA both exceeding expectations, while Technology One Limited (TNE) rose 36.8% on another strong earnings result in 1H25. Other IT stocks, WiseTech Global Limited (WTC) and Xero Limited (XRO), increased by 21.0% and 12.2% respectively, following WTC’s acquisition of e2open and a positive FY25 earnings result from XRO.
The RBA lowered the cash rate in May by 25 basis points to 3.85%, as widely expected, bringing borrowing costs to their lowest levels in two years. The unemployment rate remained at 4.1%, while the Westpac Consumer Confidence Index climbed by 2.2% in May.
Global Equities
Global equities continued their recovery in May as easing trade tensions and improving consumer confidence helped calm recession fears. The postponement of tariff increases by the US and China, along with progress in US-EU trade talks, supported market sentiment. Developed Markets rose 5.3% (MSCI World Ex-Australia Index, AUD), while Emerging Markets gained 3.7%. US equities led the rally, with the S&P 500 up 6.2%, driven by strong Technology sector performance. Growth stocks (+8.7%) outperformed value stocks (+3.2%), and small caps rebounded (+5.9%) on optimism around proposed tax and regulatory changes in the US budget reconciliation bill.
European markets also posted solid gains, buoyed by positive trade developments. The FTSE Eurotop 100 climbed 4.6%, Germany’s DAX surged 6.6%, while the UK’s FTSE 100 rose a modest 3.3% as defensive sectors lagged amid rising bond yields.
The US Federal Reserve kept interest rates unchanged at 4.25–4.50%, marking its third consecutive meeting without a change. Policymakers highlighted tariff-related uncertainty as a key risk to growth and inflation. Core inflation rose 0.2% in April, with annual rates at multi-year lows, while retail sales slowed after a strong March.
Commodities were the weakest-performing asset class, with the S&P GSCI down 8.8%. Gold prices were flat for the month but remain up 41.3% year-on-year, while oil rebounded 4.4% to USD $60.79/barrel.
Emerging Market Equities
Emerging market equities rose 3.7% in May (MSCI Emerging Markets Index, AUD), underperforming developed markets despite easing tariff concerns.
China lagged the broader index, with the CSI 300 up 1.9%, while Hong Kong’s Hang Seng gained 5.3%. Taiwan and Korea posted strong gains, supported by renewed investor optimism around artificial intelligence themes. In contrast, India and Brazil underperformed after recent strong rallies, with Brazil weighed down by a weaker currency and another interest rate hike.
China’s economic data was mixed during the month. Retail sales grew 5.1% year-on-year in April, slowing from 5.9% in March, while industrial production rose 6.1%, beating expectations but easing from 7.7% in the prior month—the strongest growth since June 2021. Inflation continued to decline, falling 0.1% year-on-year, marking the fourth consecutive month of consumer deflation as trade risks with the US dampened sentiment.
Fixed Income
Bond market volatility eased in May despite higher U.S. Treasury yields. Strong April payroll data (+177k jobs vs. +138k expected) and steady unemployment at 4.2% set the tone early in the month. The Federal Reserve maintained its “wait and see” stance as inflation continued to trend lower, while demand for 20-year Treasuries cooled, clearing at yields above 5.0%. Trade developments included China joining the 90-day reciprocal tariff pause, while the EU faced potential tariff hikes of up to 40% for slow progress in negotiations.
Moody’s downgraded U.S. Treasuries from Aaa to Aa1, citing persistent deficits, rising debt-to-GDP ratios, and lack of fiscal containment plans—marking the first downgrade since Fitch in 2023 and S&P in 2011. Against this backdrop, U.S. 10-year Treasury yields rose 24 basis points to 4.40%, while 2-year yields held steady at 3.90%.
In Japan, bond yields continued to climb, with the 10-year yield up 19 basis points, as the Bank of Japan reduced market support, drawing investor interest away from U.S. markets. Domestically, the RBA cut rates by 25 basis points in May and signaled confidence in managing inflation risks, with markets pricing in three more cuts to bring the cash rate to 3.10% by year-end. Australian bond yields edged higher, with the 10-year yield up 10 basis points to 4.26% and the 2-year yield rising 3 basis points to 3.32%.
Property and Infrastructure
The S&P/ASX 200 A-REIT Accumulation Index extended its recovery, gaining 5.0% in May after a strong 6.4% rise in April. Global real estate equities also delivered positive returns, rising 2.5% (FTSE EPRA/NAREIT Developed Ex Australia Index, AUD Hedged). Meanwhile, global infrastructure continued its upward trend, with the S&P Global Infrastructure TR Index returning 4.4%, contributing to an impressive 12-month return of 20.4%.
Australia’s residential property market recorded a 0.5% month-on-month increase (CoreLogic five-capital-city aggregate), bringing year-to-date growth to 1.7%. Rate cuts fueled gains across all capitals for the second consecutive month following a period of contraction. Darwin led the growth with a 1.6% rise, followed by Perth at 0.7%.
This article contains information first published by Lonsec. Voted Australia’s #1 Research House for 2019.
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