Equity markets’ returns were broadly flat in May as strong performing regions and sectors were largely offset by poorer performing ones. The value of the Australian Dollar decreased in aggregate against a basket of major foreign currencies, increasing overseas investment returns when measured in Australian dollar terms. International and Australian fixed interest markets posted modest negative returns with changes in bond yields broadly increasing across maturities.

The possibility of a breach of the US debt ceiling was a constant theme throughout May, with Treasury Secretary, Janet Yellen, estimating the day the Treasury would run out of money to be early in June. Raising the debt ceiling requires approval from Congress which is currently divided with the Republicans controlling the House and looking to extract fiscal concessions from the Democrats in exchange for assistance in avoiding default. Early negotiations led to no result as both parties refused to budge, however, over the final weekend in May, House Speaker, Kevin McCarthy, and President, Joe Biden, announced they had reached a tentative deal to suspend the debt ceiling until 2025. Whilst pressure has eased somewhat, Congress must act swiftly to ensure the suspension is enacted before a default occurs.

Treasurer, Jim Chalmers, delivered the Australian annual federal budget on 9 May. A key message was Australia posted its first budget surplus in 15 years of $4.2bn. Notable budget initiatives that tackled the cost-of-living relief include: subsidies on energy bills, increased bulk-billing and increased award wages. Other initiatives included funding to make Australia a world leading hydrogen producer, halving the tax increase for small businesses, and from 1 July 2025 earnings on balances exceeding $3 million in superannuation will attract an increased concessional tax rate of 30 per cent (currently 15%).

The Board of the Reserve Bank of Australia (RBA) met on 2 May to discuss global and domestic economies and markets, and to review their monetary policy. Following the April meeting where the RBA held the cash rate target steady in May, the RBA increased the cash rate target by 25 basis points, bringing the target to 3.85%. Whilst discussing their monetary policy decision the minutes noted “that inflation was still very high but had peaked, consumption growth was forecast to remain subdued for some time, and the unemployment rate was low and expected to rise gradually” and “members acknowledged that there were still significant uncertainties surrounding the economic outlook, particularly for household consumption. But, on balance, given the Board’s strong commitment to price stability and the importance of ensuring that inflation expectations remain anchored, members judged that a further increase in interest rates was warranted”. On 6 June, whilst not in the timeframe captured by this commentary, the RBA increased the cash rate target by 25 basis points bringing the target to 4.10%.

The US banking crisis of 2023 continued in May as First Republic Bank was closed and the assets were seized by the Federal Deposit Insurance Corporation (FDIC) and then sold to JP Morgan on 1 May. First Republic Bank became the third bank to fail in the US this year and the second largest bank in US history to fail.  JP Morgan paid the FDIC approximately $11bn for the majority of First Republic Banks assets in the takeover.

Equities

Major developed foreign equity markets produced broadly flat returns during May. Developed markets (excluding Australia) returned -0.2% on a currency-hedged basis (and 1.2% unhedged in Australian dollar terms, reflecting the fall in the value of the Australian dollar). The best performing of the major foreign markets was the Japanese stock market (Nikkei 225 Index) returning 7.0% (in local currency terms). 

The Australian stock market (S&P/ASX 200 Index) was negative during May returning -2.5%, with 2 out of 11 industry sectors experiencing positive returns, and 2 sectors having broadly flat returns. Information Technology was the standout performing sector returning 11.6%. The worst performing sectors were Consumer Discretionary, Financials and Consumer Staples returning -6.2%, -4.8% and -4.6% respectively.

From a foreign developed market perspective, 3 out of 11 sectors produced positive returns, whilst 1 was relatively flat and 7 were negative. Information Technology and Communication Services were the best performing sectors producing returns of 8.5% and 4.0% respectively, whilst Energy was the standout worst performing sector, returning -9.4%.

The Australian government bond yield curve shifted upwards in May, with Australian fixed interest returns for the month of -1.2% (Bloomberg AusBond Composite Index). The slope of the Australian government bond yield curve flattened substantially in May as the two-year yield increased by 0.51% and the ten-year yield increased by 0.27%.

Over May, major developed global government bond yields broadly rose. The Bloomberg Global Aggregate Index (Hedged) returned -0.5%. Notably, the United Kingdom Government two-year yields increased 0.55%, the most over two-year maturities. Over the ten-year term, also the United Kingdom Government yields rose the most of major developed governments by 0.46%.

Currencies

The Australian Dollar was mixed against major foreign currencies in May. The Australian Dollar increased 1.3% against the Euro and decreased 1.7% against the United States Dollar. The Australian Dollar finished the month at 0.6503 US Dollars, down 1.1 US cents over the month.

Commodities

Commodity prices continued to be volatile over May. The S&P GSCI Commodities Index ended the month down 6.5%. Notably, the price of WTI oil and Brent oil fell 11.3% and 8.6% respectively throughout the month as demand weakened on the back of the looming US debt ceiling and recession fears. Of the precious metals, the price of gold decreased 1.4% and the price of silver decreased by 6.3% in May. 

Performance of key markets over relevant time periods to 30 May 2023: 

Asset class	Index	Month* (% change)	FYTD* (% change)	1 year* (% change)
Australian Shares	S&P/ASX 200 Acc. Index	-2.5%	12.8%	2.9%
International Shares	MSCI World Ex Aust Unhedged A$	1.2%	18.9%	13.4%
International Shares	MSCI World Ex Aust Hedged A$	-0.2%	10.4%	1.4%
US Shares	S&P 500 Index	0.4%	12.2%	2.9%
UK Shares	FTSE 100 Index	-4.9%	7.6%	1.7%
Japanese Shares	Nikkei 225 Index	7.0%	19.5%	15.9%
Australian Listed Property	S&P/ASX 200 A-REIT Index	-1.8%	8.2%	-3.0%
Australian Fixed Interest	Bloomberg AusBond Composite Index	-1.2%	3.3%	1.7%
Australian Cash	Bloomberg AusBond Bank Bill Index	0.3%	2.6%	2.6%
Currency	AUD/USD	-1.7%	-5.8%	-9.4%

*Percentage changes in returns are for periods over the month of May (Month), financial year to date 30 June 2022 to 31 May 2023 and the prior 12 months 31 May 2022 to 31 May 2023 (Prior 12m). Past performance is not an indication of future performance.

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