Sell in May and go away? Not quite…not this time round…well at least as far as risky assets both in the US and the Eurozone are concerned. During the month of May, European and US High Yield markets registered an increase of 0.09% and 0.64% respectively whilst the European Investment Grade market registered and increase of 0.30%.

Although emerging markets rallied, the rally was not as pronounced as it was in the US, as the hawkish Fed statements half way through the month sent the dollar higher, adversely impacting emerging market credit markets by, causing emerging markets to rise by 0.34% during the month%, as measured by the benchmark BAML Indices. The hawkish Fed statements also sent US Investment Grade bonds lower by 0.15%.

Inflationary data in the Eurozone rose albeit slightly mainly on the back of a higher oil price, which also caused European government bonds to remain supported in the main by fundamental factors, namely the imbalance between supply and demand.

With the effects of QE still set to penetrate into meaningful improvements in economic data, we would expect the ECB to persist on its government bond buying spree, with the market eagerly waiting for the corporate bond purchasing to commence. With growth in Q1 stronger than the ECB had expected, we do not expect any major announcements from the ECB in its June meeting however we believe that the key test going forward will be inflation. We do not exclude additional measures to be announced by the end of the year.

Risky assets range traded for most of the month but proved their resilience towards the end of the month as better than expected data releases in the Eurozone as well as more hawkish than expected statements by the Fed’s Yellen propelled risky assets across both sides of the Atlantic higher towards the final trading sessions of the month.

Sentiment in the US improved as investors began to accept the notion of a summer rate hike after a series of toing and froing, or rather dovish and hawkish comments by the Fed over recent months. With better-than-expected April new home sales (+16.6%) and pending sales (+5.1%), the robustness of the US economy began to take centre stage once again.

With the Corporate Sector Purchase Programme (CSPP) set to start in June and clarity regarding the purchase program at the ECB meeting now sought, we would expect to see some form of credit spread tightening once again once the program begins to operate although if ECB purchases disappoint to the downside we could see spreads widen.

What is of greater concern is the June FOMC meeting and more importantly the fact that that in about three weeks’ time the UK will head to the polling booths to vote on the Brexit referendum.

We would not exclude the fact that uncertainty around the result could offset the positive tone from the CSPP at first and we would hence expect to see some volatility in the coming three weeks, as both issues are expected to dictate market sentiment and direction in the days ahead. Further hawkish statements by the Fed are also expected to keep investors on their toes as the repercussions of a stronger dollar are expected to have wider repercussions overall.

This article was issued by Mark Vella, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.