MAY MARKET UPDATE

US President Donald Trump said he would withdraw the US from an Obama-era nuclear agreement with Iran, and restore economic sanctions, in a move that hurt investor sentiment. Mid-month, North Korea abruptly cut off talks with South Korea, citing military exercises between the United States and South Korea, and threatened to cancel the planned North Korea–US summit. President Trump promptly cancelled the summit, set for Singapore in June, but after a surprisingly conciliatory statement from North Korea, the summit was reinstated.

Simultaneously, trade talks got underway between the US and China, with each agreeing to drop the tariff threats against each other while they continued to work on an agreement. But if investors believed that put an end to trade war fears they were mistaken, as late in the month, the US announced tariffs on steel and aluminum imports from the European Union (EU), Canada and Mexico, sparking promises of retaliation by these parties and reigniting such fears.

European politics spurred market concerns

A political crisis in Italy caused plenty of worries, after two “anti-establishment” parties, the League and the 5 Star Movement, struck an unlikely deal to form a coalition government, only to have their proposed cabinet rejected by the Italian President, because it contained a candidate for Finance Minister who was a self-confessed supporter of Italy withdrawing from the European Union. The president’s intervention to block the coalition plans led to a big selloff in Italian shares and bonds, because of the threat of fresh elections that could have become effectively a referendum on the Euro, but after a reshuffle, the new Italian government was agreed on the last day of the month. Markets were also keeping a close eye on Spain, where Prime Minister Rajoy appeared on the brink of being ousted from office (which did in fact happen in early June.)

Positive US economic data buoyed markets, despite weaker European results

While the geo-political news took over the headlines in May, largely positive economic data and continued robust corporate earnings reports out of the US helped to bolster markets.

US first-quarter gross domestic product (GDP) growth was revised down marginally, from an initial estimate of 2.3% annual growth to 2.2%. While down from the 2.9% annual growth rate of the December 2017 quarter, the growth figure was well ahead of the 1.2% achieved in the March 2017 quarter.

The US unemployment rate fell to 3.9% in April, the lowest level since the end of 2000, with monthly jobs gains averaging 200,000 so far this year. US job openings rose to 6.7 million at the end of April, compared with the 6.3 million Americans who were unemployed, according to the US Labor Department. This is the first time since such record-keeping began in 2000 that the number of available positions exceeded the number of job seekers.

At the end of the eventful month, the Dow Jones Industrial Average had gained 1.4%, the broader S&P 500 was up 2.4% and the technology-heavy Nasdaq Composite index was 5.5% higher.

European data was slightly weaker, with the Eurozone posting a GDP growth rate of 0.4% in the first quarter, slowed significantly from an annual rate of 2.8% to 2.5%. The unemployment rate, however remained at its lowest level since December 2008, sitting at 8.5%. Late in May, the German jobs data report showed unemployment falling to a new record low of 5.2%. The UK economy grew at 0.1% in the March quarter, for an annual rate of 1.2%, its weakest pace since 2012.

In Germany, the DAX index was down marginally, while France’s CAC 40 shed 2.2%. The Stoxx Europe 600 Index ended May up 0.2%, after April’s jump of 3.9%. The Swiss Market Index (SMI) was down 4.8%. In the UK, the FTSE-100 index ended 2.3% higher, helped by a weaker pound.

Mixed returns from Asia

In Asia, first-quarter GDP data in Japan showed the economy shrinking by 0.6% on an annualised basis, breaking the streak of eight straight quarters of economic expansion. But Japanese industrial production increased in April, up 0.3% following March's 1.4% gain, according to the Ministry of Economy, Trade and Industry.

Chinese factory activity grew at a stronger rate than expected in May, with the official manufacturing Purchasing Managers' Index (PMI) coming in at 51.9, the highest level since October 2017. (A reading above 50 indicates expansion, while a reading below that signals contraction.) The private Caixin China manufacturing PMI, which focuses on smaller and medium-sized companies, held steady at 51.1 in May, bolstered by a pick-up in production and new orders. China's official non-manufacturing PMI, a measure of services and construction activity, rose to 54.9 in May from 54.8 in April, the National Bureau of Statistics said. These numbers pointed to sustained growth momentum in China.

On Asian markets, Tokyo’s Nikkei index lost 1.2% in May, the Shanghai Composite index gained 0.4%, after touching a 19-month closing low late in the month, while Hong Kong’s Hang Seng Index retreated 1.1%. In Seoul, the KOSPI index lost 3.7%.

In Australia, the S&P/ASX 200 index added 1.1%. The Organisation for Economic Cooperation and Development (OECD) forecast the Australian economy to grow by 2.9% in 2018 and by 3% next year. The OECD expects unemployment to fall this year from 5.6% to 5.4%, and then to 5.3% next year.

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