More good than bad in May

21 June 2016

More good than bad in May

Global stock markets had a mostly positive month in May as investors considered the implications of a possible increase in US interest rates, after Federal Reserve Chair Janet Yellen on Friday said late in the month that a hike was likely in the coming months. Although the tendency to view a likely US rate rise as a bad thing – as it would take away the sugar-hit of ultra-cheap money – has not wholly vanished from investors’ mindsets, investors continued to bet in May that the Fed was becoming confident enough to raise rates.

This ‘confidence’ completely vanished with the shock May US jobs report, released on June 2.

More good in US than bad

Further signs of improving health of the US economy strengthened this conviction, in particular May data showing that US house prices rose in the first quarter of 2016 to an extent that surprised to the upside, with new home sales particularly strong; and the gross domestic product (GDP) report, released at month-end, which showed the American economy growing by 0.8 per cent in the first quarter, better than the 0.5 per cent improvement initially estimated.

Also, late in the month came news that US consumer spending – which accounts for more than two-thirds of US economic activity – rose by 1 per cent in April, its best month since August 2009.

However, these signs that the world’s largest economy was improving enough to justify a (northern) summer rate rise were offset by weak numbers coming from manufacturing and capital investment, with the ISM Manufacturing survey indicators still hovering between expansion and contraction. Against this, a significant improvement in the service sector backed the uptick in consumer demand; each of these areas outweighs manufacturing in the US economy.

Also contributing to improving sentiment was better-than-expected company earnings news; first-quarter earnings came in down 6.7 per cent, but an 8.8 per cent fall had been expected. And almost three-quarters of US companies, 72 per cent, beat earnings expectations - a result above the average percentage of ‘beats’ in past quarters.

The broad S&P 500 Index gained 1.8 per cent in May, to be up 3.6 per cent for the year.  The 30-stock Dow Jones Industrial Average racked up its fourth consecutive month of gains, rising 0.5 per cent for a year-to-date gain of 3.3 per cent, while the tech-heavy Nasdaq Composite surged 3.6 per cent in May, as shares of hit a new record high. However, the tech benchmark is down 0.6 per cent for the year so far. The US dollar rose 3.7 per cent against the euro, its biggest rise since 2014. 

Germany bucks European job trend

In Europe, jobs figures were at the fore, with eurozone unemployment remaining at 10.2 per cent, in line with expectations. However, unemployment in Germany in May fell to 6.1 per cent – the lowest level since the country’s reunification. The eurozone remained in deflation, with consumer prices showing a 0.1 per cent slide year-on-year, a smaller fall than the –0.2 per cent recorded in April. Inflation has now been below the European Central Bank’s (ECB’s) target for more than three years.

Late in the month a new bail-out package for Greece helped to lift banking stocks, while eurozone stocks reacted positively to the falling currency. In Germany, the DAX Index gained 2.2 per cent in May, although it remains 4.5 per cent in the red for the year. The CAC40 in Paris added 3.5 per cent for the month, trimming its 2016 deficit to 0.4 per cent.

In London, the FTSE 100 edged 0.3 per cent higher in May, a result weakened by a Brexit-inspired sell-off on the final two trading days. The British index has added 1.8 per cent over the first five months of the year. For May, the Stoxx Europe 600 continental benchmark advanced by 1.8 per cent, its best monthly performance since November.

China promotion prospects heartens investors, Australia powers ahead

Chinese stocks surged toward the end of the month after a Goldman Sachs report said it was likely that China’s A-share (mainland companies) market would be included in the influential MSCI Emerging Markets indices (the decision will be announced on 15 June). The last-minute spike could not stop the Shanghai Composite Index shedding 0.7 per cent for May, taking its loss for the year to 17.6 per cent.

China’s GDP grew by 6.7 per cent in the March quarter, the weakest quarter in seven years, confirming the slowing trend in the economy. While much of the growth was driven by industrial investment, consumer spending also rose sharply. The official Chinese Purchasing Manager’s Index (PMI), a forward-looking measure that focuses on activity at larger companies, stagnated on 50.1 for May (a level above 50 indicates expansion), while the official non-manufacturing PMI, which measures services, slipped to 53.1 in May from April’s reading of 53.5 (the services sector now accounts for more than half of China’s GDP). The Caixin China manufacturing PMI weakened to a three-month low of 49.2.

Manufacturing data was also weak in Japan, where the market was boosted late in the month by the decision of the Abe government to postpone a sales tax hike by up to two-and-a-half years. Japan’s Nikkei Index rose by 3.4 per cent in May, to be 9.5 per cent in the red for 2016.

In Australia, the S&P/ASX 200 lifted by 2.4 per cent, consolidating on the 3.3 per cent gain in April. At month’s end, the Australian benchmark was 3.6 per cent higher for the year. Between 11 April and the end of May, the Australian market had posted seven straight weeks of gains, gaining almost 10 per cent, outperforming its developed market peers. The market was powered by an interest rate cut at the start of May, and data showing that Australia’s economy expanded last quarter at the fastest pace in four years. 

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