Market Commentary May 2014
Global equity markets were broadly positive over the month of April, led by the UK and Europe. In the UK, business optimism hit historic highs while earnings data displayed wage growth above the rate of inflation.
Within Europe, consumer and business confidence indicators increased and various market participants speculated on the announcement of further monetary stimulus into the economy. US markets suffered from some profit taking in the technology sector against positive employment and retail sales data. Japanese markets were impacted by recent currency appreciation and nervousness over April’s consumption tax increase. Fixed interest markets were generally positive with lower credit quality bonds outperforming.
US equity market returns were mild over the month of April as broader market returns were forced lower by losses in the technology sector. First quarter GDP figures were announced much lower than expected, partly due to adverse weather conditions at the start of the year. The minutes from the recent central bank meeting revealed no reference to earlier suggestions that the bank would look to raise interest rates, shortly after ending its stimulus program. Recent data showed that the trade deficit widened by more than expected in February with imports into the US surpassing exports. The unemployment rate was unchanged at 6.7%.
European equity markets outperformed with fair disparity within sector returns. The oil & gas sector posted strong returns while the technology sector lagged, adopting global trends. The European Central Bank left interest rates unchanged at the banks recent meeting. Mario Draghi added that there was some discussion around further quantitative easing and speculation around monetary stimulus supported market returns. The unemployment rate for February was announced at 11.9%.
UK equity markets were strong following a raft of positive macroeconomic announcements. The IMF upgraded the UK’s 2014 growth forecast to 2.9% from 2.4%, the highest growth rate among all other G7 economies. The Bank of England maintained interest rates and the current stimulus program at the central banks’ April meeting. CPI inflation was announced at 1.6% in March, falling for the sixth consecutive month. The largest downward contribution came from transport, particularly motor fuels. UK unemployment was announced at 6.9% in February, lower than 7.1% expected and the lowest rate recorded in five years. Sterling reacted positively to the announcement.
Asian equity markets delivered a positive return over the month led by the Philippines. Chinese first quarter GDP was announced at 7.4%, higher than 7.3% expected but the lowest growth rate in 18 months and lower than the government’s growth target for 2014. Japanese equity markets underperformed over April. Investors were hesitant over the consumption tax increase implemented at the start of the month. In addition, the Bank of Japan confirmed no additional stimulus would take place, against some expectations.
Emerging market equities slightly lagged developed markets, with returns little changed over the April period. Latin America outperformed with Brazil delivering above consensus retail sales, lower unemployment and real income growth. Mexico also announced stronger manufacturing data, firmly in expansion. Russian markets suffered with tensions in Ukraine unresolved and the threat of further sanctions remaining. Credit ratings agency Standard & Poor’s downgraded Russia’s rating by one notch to BBB-, as the central bank increased interest rates from 7% to 7.5%. Markets in Turkey rose following results from the local elections and data showing the country had narrowed its current account deficit.
In fixed interest markets, returns were broadly positive over the month, with lower yields leading to higher prices. The US central bank continued to taper its quantitative easing program, trimming a further $10bn from monthly asset purchases. Inflation generally remains lower than most developed economy central bank targets, providing a more supportive environment for bonds. Greece issued €3 billion of 5-year notes, in the first Greek bond issuance since the Euro crisis.