Review of markets over May Do you hear the markets sing, singing the song of nervous investors? One didn’t need to listen carefully to hear that volatility was the main melody in May. While April’s tune was characterised by fairly sound gains in most asset classes, May began with a European bond market correction, which bled into US Treasuries and set the tone for a capricious month for fixed income. Amid these choppy markets, several developed market economies posted first-quarter GDP growth: euro area GDP surprised on the upside at 1.6% quarter on quarter (q/q) annualised, trumping UK and US growth for the same period. Brent and WTI crude oil prices remained steady, moving less than USD 1.50 per barrel between the start and end of May. Emerging market assets suffered, but easing from the People’s Bank of China and moderate reform progress in India offset the less constructive stories and performance of Brazil and Russia.
After three months of unprecedentedly low yields, European rates underwent a correction in the first two weeks of May, rising up to pre-quantitative easing levels. Several factors contributed to this reversal, including liquidity concerns, upgraded European inflation expectations due to rebounding oil prices and signs of an improving economy, which wiped out any chance of positive monthly returns for German (-1.1%), Spanish (-2.1%), and Italian (-2.1%) government bonds.
Nervousness spread across the Atlantic to the US Treasury market, where longer-dated bonds took the biggest hit. The US 30-year bond yield edged up above 3% for the first time this year as US Federal Reserve (Fed) chair Janet Yellen said that investors’ premium for holding bonds with longer maturities would most likely increase as the Fed began raising rates. US Treasuries were able to maintain their year-to-date returns, but weren’t able to hold on as well as UK Gilts.
The sell-off of the first half of the month slowed in tempo in the latter half. German 10-year Bund yields went from their lowest level at 0.08% on 20 April to hit their highest note at 0.70% on 14 May, before falling back down to 0.40% in the last week of the month. Rates markets were calmed partly by the European Central Bank’s (ECB’s) decision to front-load asset purchasing over the summer months, when there is typically lower issuance volume. EUR/USD fell 3.5% from the ECB’s announcement date to the end of the month, once again confirming the ECB’s influence on the markets.
Choppy bond markets tempered some developed market equity gains, but the conclusion of earnings seasons boosted both confidence and index levels in Europe and the US. The MSCI Europe ex UK, which had already posted returns of 14.6% in the year to the end of April, gained another 1.1% in May. Earnings results for the first quarter revealed that European corporates are starting to see the benefits of a lower euro and lower oil price— tailwinds that boosted revenues for exporters and non-oil related companies.
Euro area first-quarter GDP was mixed. Germany (0.3% q/q vs. 0.5% expected) and the Netherlands (0.4% q/q vs. 0.5% expected) disappointed, while Spain (0.9% q/q vs. 0.8% expected), Italy (0.3% q/q vs. 0.2% expected), France (0.6% q/q vs. 0.4% expected) and Greece (-0.2% q/q vs. -0.5% expected) surprised to the upside. Purchasing Managers’ Indices for manufacturing echoed the same dynamic.
The S&P 500 earnings season marked slightly off-key earnings-per-share growth, extending a slowdown that began at the end of last year. These declines were not due to a general deceleration in the US economy. Rather, they were the result of two broad macroeconomic headwinds: lower oil prices and the strengthening US dollar. As such, the S&P 500 has not kept up its 2014 pace, but nevertheless total returns from the index were up in May.
Japanese equities gained 5.1% this month. Outperformance was boosted by the Government Pension Investment Fund’s mandate to invest further in equities, particularly companies that offer more of their profits to shareholders. Higher return on equity and better corporate governance added to investor appetite for Japanese equities.