Market Commentary June 2014
Global equity markets were strong over the month of May despite economic growth worldwide generally falling short of consensus.
Various equity markets reached new highs over the month including the US and the UK, the latter surpassing its 14-year high. Indian equity markets broke through their all-time high following the success of the BPJ party, winning the Indian general election. The friction between Russia and Ukraine improved, as the Russian president expressed an interest in discussing a way out of the crisis. In fixed interest markets, government bond yields fell and corporate bonds also provided a positive total return.
US equity markets performed well over the month with the majority of gains in the second half, following comments from the US central bank suggesting monetary policy may remain looser for longer. US first quarter GDP second reading was announced at -1.0%, revised lower largely due to a greater than estimated decline in private inventories. Unemployment was announced at 6.3% in March, lower than the previous month’s figure of 6.7% and lower than expectations. Retail sales in April improved marginally, although lagged consensus forecasts due to falling sales across online retailers, appliances, electronics and furniture.
European equity markets were largely driven by the expectation that the central bank would shortly announce further monetary stimulus. Eurozone first quarter GDP was announced at 0.2%, lower than consensus expectations following flat economic growth in France and contraction in Italy. Inflation increased to 0.7% in April as package holidays, tobacco and electricity consumption drove the broader rate of inflation higher. Improved services data was offset by slower growth in manufacturing. Eurozone unemployment was announced at 11.8% in March, lower than consensus forecasts.
UK equity markets were positive over the month in a fairly inactive market period. UK first quarter GDP was announced at 0.8%, improving on last quarter’s growth figure but still trailing expectations. Interest rates were left unchanged at 0.5% and the quantitative easing program was maintained at the Bank of England’s May meeting. The rate of unemployment was announced at 6.8% in March, in line with forecasts and lower than 6.9% in the previous month.
Asian equity markets were supported by strong gains in the Indian equity market. The election result marked the first time in 30 years where India had a government with an overall majority. In China, the State Council set a range of market reforms to increase foreign investment, promote more efficient capital allocation and improve market transparency. Credit rating’s agency Standard & Poor’s upgraded the Philippine’s rating to investment grade status, having a positive impact on markets. Japanese first quarter GDP was announced at an annualised rate of 5.9%. This was considerably higher than expected, led by a significant increase in purchases, ahead of the upcoming increase in consumption tax. CPI inflation was confirmed at 2.7% in April, although the figure was nearer 1% when stripping out the increase in consumption tax.
Emerging market equities were positively impacted by the raft of positive news across Asia. Emerging Europe outperformed following improvements in Ukraine given Vladimir Putin’s announcement. In addition, Russia secured a $400bn deal to supply gas to China, the world’s leading energy user. Interest rates were cut in Turkey by 0.5% to 9.5% as well as a 0.10% rate cut in Hungary. Latin America underperformed the broader market as Brazilian GDP was announced at 0.2% in the first quarter, lower than forecasts.
Fixed interest markets produced broadly positive returns amid a period of disappointing economic growth announcements. The potential of prolonged monetary stimulus in the US was also supportive of the market. Bond yields fell across Europe adopting the view that the central bank would either reduce interest rates further, or extend the banks easing programme. Corporate bonds outperformed government bonds marginally over the month.