• May witnessed the continued recovery in the U.S. story as U.S. assets (the dollar, equities, high yield fixed income) posted positive returns and outperformed international markets. 
  • The recovery in commodities also continued into May as the 12-month futures oil strip broke through the $50/barrel for the first time since August 2015. Commodity investors are expressing confidence in global demand and believe that supply imbalances are being addressed. 
  • Starting earlier in the month, Federal Reserve officials communicated a policy shift that opened the door for a 2nd rate hike at the June or July meeting.  The implied probability of a June rate hike from Fed Funds futures pricing shot up from 5% in mid-May to 24% at the end of the month. The probability of a rate hike at the July meeting is now over 50%. 
  • Will the tightening pace be gradual or will it accelerate on signs of economic normalization and higher inflation?  Bonds investors do not seem to share the same inflationary outlook as the Fed. The U.S. government yield curve did not steepen but flattened as the 5- and 10-year bond changed little following the Fed communication.  Long-term inflation expectations embedded in TIPs versus nominal pricing also declined during the month. 
  • Equity investors continue to shun the market recovery meme based on the strong flows into defensive-oriented ETFs such as low volatility as well as positioning for summertime volatility spikes based on flows into volatility-tracking ETFs and leveraged short ETFs. 
  • “Sell in May” did not work this year, but investors are still climbing the wall of low volatility anticipating that at current market valuations and without much transparency into sales and earnings recovery, we are due for another correction.  With the upcoming Brexit referendum and ongoing concerns about China’s economy, this summer could turn out to be as interesting as last summer. 

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