At a glance
Global stocks in May rose for a second consecutive month after robust readings on the US economy and its healthy corporate earnings. Optimism that China and the US would avoid a trade war offset political uncertainty in Italy that jeopardised the country’s euro membership, and news that key emerging markets such as Argentina are struggling. A gain in the Australian dollar reduced gains for those who have unhedged investments in global equities. During the month, seven of the 11 sectors rose in US-dollar terms. Information technology (+6.3%) and energy (+1.7%) rose most, while telecoms (-5.4%) was the worst performer. The Morgan Stanley Capital International (MSCI) World Index rose 0.63% in US dollars and 0.39% in Australian currency.
Australia
Australian stocks rose for the third month in four, after higher commodity prices boosted energy and materials stocks and the federal government’s budget was well received. Brent crude oil prices increased 4.6%, while the LME Metals Index gained 1.5% after nickel, lead, aluminium and copper rose(to the benefit of relevant stocks), while iron ore and gold fell. The federal budget showed the government is intent on cutting corporate and income taxes, while an economy growing at about 3% p.a. is forecast to return the budget to a small surplus by 2019-20, a year earlier than previously planned. News on the economy was mostly positive. The NAB Monthly Business Survey found the business ‘conditions’ index rose 6 points in April to +21, the equal-highest level since the survey started in 1997. A report showed the economy added 22,600 jobs in April though the jobless rate rose 0.1 decimal points from March to 5.6% after more people sought work. The Reserve Bank’s policy-setting board kept the cash rate at the 1.5% on which it has sat since August 2016. The S&P 200 Accumulation Index rose 1.1%.
US
US stocks rose for a second consecutive month after companies, especially tech ones, beat expectations on earnings. The start of trade talks between China and the
US pointed, for most of the month, to smoother relations on trade, and economic news was buoyant. Financial research and data company FactSet said that 78% of companies that had reported earnings by 25 May, announced earnings per share above mean estimates, the highest rate since FactSet began tracking this measure in 2008. Trade announcements such as China’s decision to reduce import tariffs on cars from 25% to 15% from 1 July signified progress in China-US trade talks. Economic news released during the month was positive enough. The employment report showed the US economy added 164,000 jobs in April, to reduce the jobless rate to 3.9%, its lowest since 2000. Other reports showed US economic growth for the first quarter was revised down 0.1 points to a still-respectable 2.2% annualised, while the Federal Reserve’s preferred inflation gauge, the Commerce Department’s price index for personal consumption expenditure, stayed at the central bank’s inflation target when it rose 2% for the 12 months to April. Minutes from the Fed’s policy-setting board’s meeting in May pointed to a rate increase in June. The S&P 500 Index rose 2.2%.
Europe
European stocks fell for the third month in four, after political events in Italy sparked concerns that Italy could one day leave the euro. Spain’s Prime Minister Mariano Rajoy faced a vote of no confidence (that he duly lost on 1 June), and reports showed the economy is slowing. While Italy formed a left-right populist government under Prime Minister Giuseppe Conte on 1 June, three months after inconclusive elections, the country had veered towards a fresh poll that could have been an unofficial vote on the country’s use of the euro. A new poll appeared likely when President Sergio Mattarella refused to accept Paolo Savona as economy minister in the coalition between the anti-establishment Five Star Movement and the right-wing League and he proposed a stop-gap government to take the country to fresh elections. Such an outcome was averted when on 31 May, Mattarella agreed to Giovanni Tria as the compromise economy minister. Spain’s leader of a centre-right government faced a no-confidence motion over a corruption scandal. In economic news, a report showed the eurozone expanded 0.4% in the first quarter of 2018, down from 0.7% the previous quarter. The Euro Stoxx 50 Index lost 3.7% though the UK’s FTSE 100 Index rose 2.2%, its second consecutive gain.
Asia and emerging markets
In Asia, Japanese stocks fell for the third time in four months after a report showed the economy contracted at an annualised rate of 0.6% in the first quarter, to end its longest expansion in 28 years.
Chinese stocks rose for the first time in four months as manufacturing gauges improved. Emerging markets overall struggled, however, after Argentina began formal talks with the IMF to stabilise its economy and currency. Japan’s Nikkei 225 Index lost 1.4%, China’s CSI 300 Index rose 1.2% while the MSCI Emerging Markets Index shed 3.8% in US dollars, its fourth consecutive decline.
Movement in benchmark indices are in local currency unless stated otherwise. As is common practice, all indices mentioned are price indices apart from the MSCI indices and the S&P 200 Accumulation Index.
Sources: J.P. Morgan, FactSet, Bloomberg and national statistical including the Australian Bureau of Statistics, Eurostat, the US Department of Commerce and the US Department of Labor.