Market Analysis May 2019

Throughout May, US equities encountered significant weakness as US-China trade negotiations faltered. The US escalated tariff rates on $200 billion worth of Chinese imports, prompting China to respond with higher tariffs on $60 billion worth of US imports. The Federal Reserve maintained its dovish stance throughout the month.

Economic indicators during this period presented a mixed picture. While nonfarm payroll employment increased by 263,000 in April, reducing the unemployment rate to 3.6%, the US manufacturing purchasing managers' index fell to 50.6, signifying contraction in the sector. Consumer confidence, however, remained high at 134.1 in May.

The US administration's blacklisting of Chinese tech giant Huawei due to security concerns, as well as the announcement of a 5% tariff on Mexican imports to address immigration issues, contributed to investor unease about global growth prospects. This sentiment affected sectors such as technology, energy, and industrials, although utilities, healthcare, and consumer staples demonstrated greater resilience. The real estate sector outperformed. It's important to note that past performance doesn't guarantee future results, and the mentioned sectors, securities, regions, and countries are for illustrative purposes only and shouldn't be considered as recommendations for trading decisions.

In May, Eurozone equities experienced declines due to the escalation of tensions between the US and China, leading to a "risk-off" sentiment. The MSCI EMU index recorded a -6.4% return, with materials and financials sectors facing significant losses, while utilities and consumer staples displayed more resilience. Sectors sensitive to global trade, including autos and semiconductors, suffered notable declines. Investors favored safer assets like government bonds over equities.

Germany's Q1 GDP growth of 0.4% managed to avoid a recession, yet forward-looking data remained lackluster. The Ifo business climate index for Germany dropped to 97.9 points, indicating deteriorating sentiment among businesses. Italy's fiscal situation garnered attention as the European Commission revised its 2019 GDP growth forecast to 0.1%, implying a budget deficit beyond the previously agreed level. Notably, the European Parliament elections witnessed centrist parties losing ground, Green parties gaining momentum, and anti-EU populists making limited progress.

May saw UK equities underperform, particularly in economically-sensitive sectors such as financials, industrials, and mining. The pound also experienced a sharp decline, prompted by renewed uncertainty surrounding Brexit. Concerns about a disorderly exit from the EU were amplified by Prime Minister Theresa May's resignation following a party rebellion.

Despite the political turmoil, the preliminary Q1 GDP release from the Office for National Statistics indicated a 0.5% expansion, as projected. The Bank of England revised its 2019 growth forecast upwards in its quarterly inflation report, from 1.2% to 1.5%, partially reversing the downgrade made in February.

Manufacturing activity, which surged prior to the Brexit deadline, showed signs of unwinding. Markit's UK manufacturing purchasing managers' index (PMI) declined by two points to 53.1 in April, suggesting that the surge was driven by stockpiling to mitigate the impact of a disorderly EU departure. Nonetheless, services activity stabilized, with the services PMI rising to 50.4 in April from below 50 in March.

May brought a substantial decline in the Japanese equity market, resulting in a total return of -6.5%. The appreciation of the yen against other major currencies added to the pressure on equity prices, driven by its perceived safe haven status.

The escalation of trade tensions, notably the US-China conflict, shattered hopes for an imminent resolution, as the US raised tariffs on Chinese imports. This had a considerable impact on global supply chains, affecting Japanese electronic component suppliers. Additionally, a slowdown in earnings growth, combined with new US tariffs on Mexico, negatively affected Japanese auto companies that had invested in production facilities under the original NAFTA agreement.

Economic data in Japan presented mixed signals, with Q1 real GDP growth being a positive surprise, expanding at an annualized rate of 2.1%. While this detailed breakdown wasn't entirely encouraging for the domestic economy, it indicated a temporary avoidance of a technical recession. The potential postponement of the planned consumption tax increase for October also loomed as a significant possibility.

In Asia excluding Japan, equities faced a downturn due to exacerbated US-China trade tensions, which led to losses across global markets. Chinese stocks were particularly impacted by the intensifying trade conflict and weaker-than-expected April economic data. Meanwhile, Indian stocks bucked the trend, experiencing outperformance following Prime Minister Narendra Modi and his party's resounding victory in the national elections.

In ASEAN markets, the Philippines outperformed due to gains in communication services and consumer staples stocks. Political developments included a victory for Philippine President Rodrigo Duterte's allies in mid-term elections and the re-election of Indonesia's President Joko Widodo.

May witnessed a risk-off sentiment as US-China trade tensions escalated, causing a reversal of previous months' strong gains. Optimism for a trade agreement between the two nations was dashed, leading to the US increasing tariffs on $200 billion of Chinese imports from 10% to 25%. In addition, the US blacklisted Chinese tech firm Huawei and proposed a 5% import tariff on Mexican goods in response to immigration concerns.

Economic data was generally lackluster. The US composite leading indicator hit a three-year low, with manufacturing and services components teetering near contraction levels. Eurozone data showed mixed results, with German activity data underperforming and French business confidence showing slight improvement.

Global government bond yields experienced significant declines, with the US 10-year Treasury yield dropping by 38 basis points to around 2.1%. Similarly, German Bund 10-year yields fell by 21 basis points, returning to negative territory. Italian politics and debt levels resurfaced, causing Italian 10-year yields to increase by nearly 10 basis points, while two-year yields rose by 23 basis points.

Investors sought refuge in safe havens, leading to gains in global government bonds while riskier assets faced challenges. High yield bonds underperformed investment grade credit, and emerging market bond yields decreased, accompanied by a general weakening of EM currencies.

Comparatively, convertible bonds showed resilience, with a modest 3% decline in US dollar terms, compared to a larger 5.8% drop in the MSCI World index. US convertible bonds became more attractively priced, while European, Japanese, and Asian convertibles traded below fair value.