May, a month of contrasts: stability, optimism, and concerns in the markets

May is proving to be a month of contrasts in the financial markets, with a scenario that, while it has generated some stability and optimism, has also raised concerns and expectations among investors. After a April marked by geopolitical instability and doubts about the expected interest rate reductions, this month has brought a positive boost to the main indices, reaching historic highs. Despite initial fears, the geopolitical war did not significantly impact oil prices, remaining in a range between 80 and 90 dollars. However, GDP growth in the United States slowed down in the first quarter to a 1.6% annual rate, while the unemployment rate slightly increased in April to 3.9%, mainly due to a slowdown in public employment, which has revived the threat of stagflation. In this context, Jerome Powell, Chairman of the Federal Reserve (Fed), acknowledged that the fight against inflation is proving to be more challenging than expected, with a 3.4% increase in the CPI in April. Nevertheless, the probability of a recession has decreased for the fourth consecutive month, and expectations of a sharp interest rate reduction have decreased, with investors anticipating only two cuts in 2024, starting in September. In the eurozone, inflation seems to be approaching the 2% target, and the President of the European Central Bank (ECB) has indicated that they are prepared for an interest rate reduction in June if inflation data remains positive. However, countries like Poland, Hungary, Switzerland, Czechia, and Sweden have taken the lead in interest rate cuts out of fear of further economic slowdown. Despite the concerns, financial markets have reacted positively to the possibility of an interest rate reduction, boosting stock indices in Europe and the United States. The Eurostoxx 50, the Ibex 35, the Dax 40, the FTSE 100, and the CAC 40 have experienced significant increases so far this year. However, not only monetary policy defines the outlook for investors. Market anxiety is reflected in VIX index futures, indicating concern about the US elections in November and their impact on fiscal policy. Both Democrats and Republicans present scenarios that generate uncertainty, especially in economic and trade matters. Gold, considered a safe haven asset, has experienced a significant increase in 2024, while emerging market bonds have surprised with a recovery in May, driven by various factors such as high fuel prices and IMF aid packages. In this game of expectations, a challenging scenario emerges in the battle against inflation, where the price of money may not necessarily follow the expected trajectory. Central banks face the difficult task of balancing economic growth with inflation containment, in a global context marked by uncertainty and market volatility.