May was a strong month for share markets boosted by a reduction in tariff tensions, central bank rate cuts and resilient
economic data. Markets have recovered sharply from the 7 April lows reached shortly after President Trump’s “Liberation
Day”. The most significant development over the past month was the de-escalation in tariff tensions, particularly between
the US and China, but also in broader terms with other trading partners. Liberation Day tariffs were more severe than
expected, especially tariffs on China. However, since reciprocal tariffs were announced, a series of steps have unfolded that
have lowered the tariff temperature, at least for the time being.
Tariffs uncertainty, bond market ructions and foreign exchange volatility accelerated over May, and yet share markets were
able to advance despite “the noise”.
Australian shares rose in May, with the ASX 200 up +4.2%. Technology was the best sector (+18.8%), while gold stocks
also outperformed (+10.5%). Defensive stocks were poor performers, as one would expect during typical market rallies.
Utilities (+0.3%) were the worst performing sector, followed by Staples (+1.2%) and Health (+1.4%). Australian shares have
rebounded nearly 18% from the April low, but the month’s gain was driven by PE expansion, rather than by a growth in
earnings. The ASX 200 forward PER is 18.8x, back to the highs of November 2024.
Despite intra-month volatility, the US S&P 500 ended May up 5.5%, Nasdaq up 7.8%, while the Dow gained 3.7%. A hot tech
sector, encouraging inflation data, and a growing consensus that the Trump administration will back off its most severe tariff
threats helped power the gains. The so-called “Magnificent 7” were significant contributors to the US market spike, and the
Mag 7 companies reported actual earnings growth of 27% for the first quarter. Overall, 6 out of the 7 mega-tech companies
reported positive EPS surprises.
Indeed, US stocks delivered their best month since late 2023, ignoring the daily twists and turns of tariff news to leave the
key indexes just above where they began the calendar year. Other global markets were strong as well, with Japan up +4.5%,
the UK was up +3.2%, France flat, and Germany +3.9%. China was up 1%.
Commodity markets ended the month mixed, with gold and copper better but iron ore and Brent crude either unchanged or
a touch weaker. For the year to date, gold is up 25%, copper is up 17%, but iron ore is down 4% and Brent crude down 15%.
The Australian dollar found support during May and was slightly up, ending the month at around US$0.644. Year to date, the
AUD has appreciated around 4% compared to the USD.
Bonds have fared far worse than stocks. The benchmark 10-year US Treasury yield rose nearly 20bps to 4.42% in May as
traders scrutinized the president’s multitrillion-dollar fiscal package. Moody’s stripped US debt of its triple-A rating, citing
the government’s huge debt, and lacklustre demand for Treasuries at a 21 May auction added to concerns. The Australian
10 year bond yield rose 15bps and ended the month at 4.29%. Japanese bonds were a feature, selling off sharply and with
yields rising more than 20bps to 1.5%.
Global Outlook
During May, markets adjusted to reflect improved global growth prospects as tariff tensions de-escalated. Commentators
are forecasting global GDP growth of around 2.5% for 2025 and similar growth for 2026, slightly stronger than the 2.25%
forecast for both years a couple of months ago. The global growth upward revision reflects a more constructive outlook for
China’s economy.
Reduced tariff tensions and firmer global growth have contributed to changes in the global monetary policy outlook.
Reduced trade tensions and more resilient global activity are likely to have differing implications, with developed country
central banks more likely to respond to improved growth prospects with less-dovish monetary policy. For emerging
economies, more stable local financial markets and currencies could allow for more dovish monetary policy.
Most countries saw temporary tariff relief from early April, while more significantly, the US and China agreed to temporarily
reduce tariffs early in May. Negotiations stay on the table, but the improvement in sentiment suggests a more orderly global
GDP growth outlook than previously feared.
As tariff tensions eased and financial markets recovered, the US dollar staged a modest recovery. Although markets have
returned closer to normal functioning, and further de-escalation in tensions or trade agreements could see the USD’s
rebound extend further, the second half of 2025 will probably remain a challenging period for the USD, given the
outlook for a US growth slowdown and further Fed easing.
Australia
On 20 May, the Reserve Bank of Australia (RBA) lowered the official cash rate by 25 basis points from 4.1% to 3.85%.
This decision followed the RBA’s May meeting and marked the second rate cut this year. The move was influenced by a
combination of factors, including a decrease in inflation and concerns about global economic uncertainty.
The Minutes of May’s meeting noted the Board considered cutting 50bp, reflecting downside risks to both the global
and domestic outlook, but ultimately decided to cut 25bp given “a preference to move cautiously and predictably when
withdrawing some of the current policy restriction.” The Minutes also flagged “the possibility that the prevailing uncertainty
from global events might best be managed by adopting a path of least regret, which, given the current distribution of risks,
would be likely to involve a lower cash rate.”
Most economists expect further 25bps cuts in July and August, perhaps followed by a final cut in November to a terminal
rate of 3.1%. This will depend on what happens globally, but the RBA’s focus will remain on upcoming domestic data
including the CPI, GDP growth and employment reports.
On the pace and depth of cuts, the Minutes noted the Board “judged that it was not yet time to move monetary policy to an
expansionary stance, taking account of the range of estimates involved, given that inflation was yet to return sustainably
to the midpoint of the target range and the staff’s assessment that the labour market was still tight. These considerations
and the prevailing global policy uncertainty led members to express a preference to move cautiously and predictably when
withdrawing some of the current policy restriction.”
On inflation, the Board noted the “underlying inflation had continued to ease as expected, was back at the midpoint of
the 2–3% range in six-month annualised terms and was forecast to remain close to the midpoint throughout the forecast
period.”
