Market Review for May 2015

, Market Review for May 2015

Global stocks rose modestly amid a strong rally in the energy sector. Rising oil prices, surging M&A activity and central bank stimulus measures helped to support world stock prices despite a slowdown in U.S. economic growth during the first quarter. Emerging markets rallied as market observers pushed back the timing of an increase in interest rates by the Federal Reserve to later in the year. Bond markets declined and the dollar lost ground against the euro, the pound and most other currencies.

North America

U.S. stocks again touched fresh highs in April, but ended only slightly improved after a weak GDP report sparked a late-month sell-off. The Standard & Poor’s 500 Composite Index gained 1%, as did the Nasdaq Composite index; both measures hit all-time closing highs on April 24. The Dow Jones Industrial Average rose just 0.4%.
Energy had the best sector return, advancing 7% as U.S. crude oil futures soared 25% to end the month just under $60 a barrel. Oil services companies such as Transocean and Diamond Offshore Drilling saw gains in excess of 20%, reversing months of declines on hopes the oil price had bottomed.

The health care sector lagged, losing 1%. Major biotechnology declined after reporting lower-than-forecast sales of key drugs. Within the consumer staples sector, dividend-friendly tobacco stocks had the best returns, but most companies complained of the strong US dollar negatively affecting sales.

The information technology sector rose 2% overall. Microsoft climbed 20% as a boom in cloud services bolstered its fiscal third-quarter earnings, offsetting poor sales of its Windows and Office products. Apple shares rose 1%; the company reported a 33% increase in profits fueled by its new large-format iPhones and raised its dividend, but hardware problems with its highly anticipated Apple Watch dampened investor enthusiasm. Social network operators Facebook, LinkedIn, Twitter and Yelp all declined as they reported lower-than-expected revenues and/or trimmed their forecasts.

Gross domestic product growth for the first quarter came in at a disappointing 0.2%, calling into question the durability of the U.S. economic rebound. Harsh winter weather, a labor dispute at West Coast ports, the strong dollar and cheap oil were cited as possible contributors to the slowdown. Amid a decline in business spending, the manufacturing was weaker than anticipated, and March inflation stayed below the Federal Reserve’s target for the 35th consecutive month. At its April rate-setting meeting, the Fed maintained its positive view of the economy while acknowledging the first quarter’s “transitory” weakness and said it would wait for further signs of economic improvement before it took any action on rates.

Employers added just 126,000 new jobs in March — about half the forecast number. Faster wage growth was a bright spot in the employment picture. McDonald’s announced it would raise wages later this year, joining Target and Wal-Mart in voluntarily hiking its entry-level wage above the federal minimum.

Bonds declined as investors evaluated prospects for higher interest rates. The Barclays U.S. Aggregate Index shed 0.4%, with issues of longer maturity faring worst. The yield on the benchmark 10-year Treasury note ended 11 basis points higher at 2.03%. Corporate bonds shed 0.7%.


European stocks declined sharply in the final days of April, erasing gains from earlier in the month amid concerns about slowing global economic growth. Following a disappointing U.S. GDP report, European financial markets quickly reversed course. The MSCI Europe Index ended the month essentially flat, while the euro gained 4% against the U.S. dollar.

Markets also were pressured by the ongoing debt crisis in Greece, where new political leadership is seeking to renegotiate the terms of a €240 billion international bailout. Several attempts to resolve the crisis failed and the resulting impasse raised fears yet again that Greece might default on its obligations and exit the 19-member Eurozone. Contentious negotiations continued through the end of April. Yields on short-term Greek sovereign debt soared well above 20% at times, reflecting the high level of uncertainty.

The rapid reversal in sentiment came despite high hopes for the European Central Bank’s new U.S.-style quantitative easing program. In March, the ECB launched a €60-billion-a-month bond-buying initiative designed to encourage lending and boost the euro-zone economy. The aggressive policy move sparked a strong first-quarter rally in European stocks and bonds, prompting ECB President Mario Draghi to declare that the bank’s actions are “continuing to underpin confidence in the euro.”

Sector returns were mixed, highlighted by a rebound in the energy sector. Energy stocks rose 8% amid stabilizing oil prices and a jump in M&A activity. Royal Dutch Shell said it would acquire a British natural gas company for $70 billion. Falling oil prices have raised expectations for consolidation in the industry, sending shares of several other European oil companies higher, including BP, Total and Eni.

Telecommunication services and utilities stocks also gained ground, rising about 2% as M&A speculation spread to those sectors, as well. Health care and consumer discretionary stocks declined, losing about 1% overall. In the consumer discretionary sector, shares of automakers BMW, Daimler and Volkswagen slipped on worries about a slowing global economy. Among financial stocks, Deutsche Bank shares sank after Germany’s largest lender reported a 50% decline in profits — primarily due to a $2.5 billion settlement related to allegations that the bank manipulated a key benchmark for European interest rates.

In bond markets, investor sentiment also reversed course late in the month, with German bonds suffering the biggest two-day sell-off since November 2011. For the month, the yield on Germany’s benchmark 10-year note rose 19 basis points to 0.37%. Prior to the late-month reversal, bond yields had fallen to historic lows in several euro-zone nations. In one extreme example, Switzerland on April 8 issued 10-year notes at a negative yield of −0.055%. It was the first time in history that a country has sold 10-year maturities with a yield below zero.


Japanese equities rose, supported by strong demand from foreign investors and the government pension fund. Early gains were reduced on the final day of trading as investors took profits, disappointed that the Bank of Japan refrained from expanding its stimulus program. The yen finished slightly stronger against the U.S. dollar, while the MSCI Japan and MSCI Pacific indexes each advanced 3%.

Financial stocks rose 8%. Elsewhere, telecommunications giant SoftBank gained after forming a partnership with online file sharing company Dropbox. SoftBank’s shares were also supported by news that its Sprint unit would provide network access for Google’s planned wireless service. Several exporters experienced strong results. Sony gained 14% after raising operating profit forecast for the fiscal year. Panasonic also climbed after reporting a net profit increase of almost 50% as its focus shifts from consumer electronics to automotive technology. Japan Tobacco rose 11%, benefiting from its high exposure to Russia as the ruble continued to rebound.

Economic indicators have been mixed since Japan’s emergence from recession in the calendar fourth quarter. In March, the country posted its first monthly trade surplus since 2012 due to a combination of stronger shipments of cars and electronics and lower oil prices. The consumer confidence index reached the highest level since November 2013. However, this did not translate to higher retail sales, which plummeted 9.7% in March from a year earlier. The Bank of Japan lowered its price projections and pushed the date for achieving its 2% long-term inflation goal into mid-2016. Additionally, Fitch downgraded the country’s credit rating one notch following a similar move by Moody’s late last year.

The MSCI Australia Index fell 2%. The Reserve Bank of Australia left interest rates unchanged after its April meeting, citing an overvalued currency and waning demand for a variety of commodities as continued headwinds to economic growth. The decision — which surprised investors — caused the Australian dollar to strengthen. For the month, the currency appreciated 3%. Speculation that the nation’s credit rating could be at risk given widening government deficits hurt the share prices of the largest banks. Commodity-related shares helped buoy markets amid a rally in iron ore and oil prices. Mining giant BHP Billiton rose 3%, while Origin Energy gained 13%.
Shares listed in Hong Kong rose 9%, helped by a surge in flows from mainland Chinese investors. Late in March, the China Securities Regulatory Commission announced new guidelines to enable local mutual funds to join high-net-worth investors in purchasing Hong Kong–listed stocks via the Shanghai–Hong Kong Stock Connect. Hong Kong Exchanges & Clearing gained more than 50% as the company said it would move to expand its trading capacity to ensure it can handle the higher volumes that have come through the cross-border trading channel.

Emerging Markets

Emerging markets stocks rallied, despite concerns about weak corporate earnings, as investors seemed to take comfort from a likely delay in U.S. interest rate hikes. Higher commodity prices following last year’s sharp drop also boosted sentiment. The MSCI Emerging Markets Investable Market Index advanced 8%, led by energy, materials and financials. Emerging markets bonds gained amid the continued search for yield in the developing markets. Widespread currency appreciation also lifted local bond returns in U.S. dollar terms, with currencies such as the Brazilian real regaining ground against the U.S. dollar.
Signs that the oil price rout may have ended bolstered equity markets in Brazil and Russia. Shares of Gazprom advanced 25%, fueled by expectations for an improving outlook on the heels of weak annual profits. The MSCI Russia Index rose 17%, supported by the 13% appreciation of the ruble. Russia’s central bank continued to loosen monetary policy, cutting interest rates by 150 basis points to 12.5%, following a sharp hike to 17% at the end of last year.
Brazilian stocks rose 17% despite ongoing worries about sluggish economic growth. Ordinary shares of Petrobras rallied 59%; the Brazilian energy heavyweight announced a near $17 billion write-down after a massive corruption scandal shook investor confidence in recent months. The Brazilian real gained 7% against the U.S. dollar following a 17% drop in the first quarter. The country’s central bank further hiked interest rates as inflation remained well above target.

The MSCI China Index rallied 18% as investors appeared to cheer continued policy easing measures. Evidence of slowing economic growth boosted expectations for further loosening: China’s GDP expanded 7% in the first quarter, compared with 7.3% in the fourth quarter — its weakest pace in six years. The country’s central bank unexpectedly cut reserve ratio requirements — the amount banks must set aside in cash — by 100 basis points, offering additional reductions for select rural and agricultural firms. The move was the second reduction in reserve ratio requirements this year. Bank shares rose sharply. Financial stocks also supported equity gains in South Korea. The MSCI South Korea Index advanced 7%, with several banks posting robust earnings despite low interest rates. South Korea’s central bank cut rates to a record low of 1.75% in March.
Several oil-importing markets in Asia retreated. Indian stocks lost ground, falling 6% after strong gains earlier in the year. Meanwhile, Indonesian equities lost 9%, hurt by weak corporate profits. Thai stocks lagged broader market gains, ending flat amid concerns about a dim economic outlook. The Bank of Thailand surprised markets, reducing the benchmark interest rate to 1.5%.

In debt markets, Venezuelan bonds rallied on the heels of sharp declines earlier this year, helped by the stabilization of oil prices and investor hopes that the country might be able to avoid a debt default. Local bond markets rebounded, with currency appreciation supporting strong gains in Brazil and Russia. But Turkish local debt fell further as the lira continued to slide; the country’s central bank kept interest rates steady in the face of stubbornly high inflation. The lira depreciated 3% against the dollar, taking its year-to-date loss to 13%.

Corporate issuance remained robust as companies sought to take advantage of lower global interest rates. A number of oil and gas companies issued debt to help offset the impact of falling oil prices last year. China Petrochemical (Sinopec) sold $6.4 billion via a combination of U.S. dollar and euro-denominated debt in Asia’s third-biggest bond sale on record, next only to issues by the Bank of China and Alibaba in 2014. State-owned China National Offshore Oil Corporation (CNOOC) sold nearly $3.8 billion in U.S. dollar debt.