As was the case overseas, Australian Mining stocks under performed heavily as the price of iron ore plummeted and Energy stocks under performed despite a rallying oil price. Industrial stocks with foreign earnings generally outperformed, benefiting from the fall in the Australian dollar. As is often the case at this time of the year, we saw an uptick in profit guidance downgrades from companies.

Investor sentiment received a boost early in the month when the Reserve Bank of Australia made an unexpected cut in official interest rates, after a very low inflation reading for the March quarter. It was the first reduction in rates since May 2015, and took the official rate to a historic low of 1.75 per cent. On the day of the rate cut, the S&P/ASX 200 index jumped 2.1 per cent. At its peak in May, the benchmark share index hit a nine-month high.

The Reserve Bank’s decision to cut rates and the slump in iron ore prices had a negative impact on the Australian dollar, which fell against most major currencies. At the same time, the U.S. dollar rallied as the US Federal Reserve put a near-term rate hike in play.

Global equity markets generally drifted lower through the month but rose sharply later in May following comments from senior Fed officials on a possible June interest rate hike.  This was a somewhat surprising reaction because in the recent past, equity markets have tended to fall in response to expected interest rate increases. Investors appeared to focus on the good news that the U.S. economy has recovered enough to withstand a second hike in rates from very low levels.

Fed Chair Janet Yellen said a rate rise would be “appropriate” in coming months as the economic data has improved [1]. Markets are betting on a June or July rise.

A vote on whether the UK remains in the European Union will take place on 23 June.  While most commentators expect UK voters will elect to remain in the EU, this will continue to be a source of instability and uncertainty for investment markets leading up to the vote.  If the actual outcome is to leave, this is expected to be negative for UK and European markets.

Global government long bond yields generally fell during the month. The Australian government 10-year bond yield fell sharply on the back of the RBA’s rate cut.

Commodity prices generally fell, dragged down in part by a rising U.S. dollar. The iron ore price fell heavily, as Chinese authorities took measures to dampen speculation. The oil price rallied strongly on supply disruptions and continuing falls in U.S. shale production.