Monthly market update May '20
The following update is from Willis Towers Watson, the views, thoughts, and opinions expressed in the text belong solely to the author.
May saw a continuation of the recovery in global markets despite mixed news around the slowing of COVID-19 cases, and renewed trade tensions between China and the U.S. Although new virus cases had trended down in developed nations, several emerging markets, including Brazil, India and Mexico, saw the rate of cases increase in the month. Positive news on lifting lockdown measures, the continuation of government stimulus through financial markets and direct fiscal spending, and prospects of a vaccine contributed to the large gains in equity markets in May, especially in the last week of the month. Risks remain on the horizon, however, including the chance of a second wave of the virus, a slower economic recovery than forecast, and the resulting negative impact on employment.
U.S. equity markets again performed strongly with the S&P 500 Composite returning 4.7% (in local currency terms). Positive equity market returns were against a backdrop of a 14.7% unemployment number for April – the highest in post-war history. The majority of states, however, have relaxed lockdown measures despite increasing infection rates in a number of areas. The Federal Reserve didn’t make any meaningful changes to its policy at the May meeting, with Jerome Powell signalling a reluctance to use negative rates given the stress it would place on the country’s financial system. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 37 in May, from 30 in the previous month. The Markit US Manufacturing PMI improved to 39.8 off its record low of 36.1 in April. Although both outcomes improved over May, any number below 50 signals a contraction in activity.
The Chinese equity market returned -0.3% (in local currency terms) for the month, as measured by the Shanghai Composite Index. As noted above, trade tensions between China and the U.S. were heightened during the month with inflammatory comments from President Trump regarding China’s controversial new Hong Kong security law setting the scene. Despite this, the Caixin Manufacturing PMI increased slightly to 50.7 in May, from 49.4 in April. The USD appreciated against the CNY over the month by 1.1%.
European equities, as measured by the Euro Stoxx 50 Index, returned 4.8% over the month (in local currency terms). The Eurozone PMI Composite Output Index increased to 31.9 in May, above the previous all-time low of 13.6 in April. The statistic has been below 50 (signalling a contraction) for three months now. The Eurozone Consumer Economic Sentiment Index printed at -18.8 (-100 indicates an extreme lack of confidence, 0 neutrality and 100 extreme confidence).
Australian shares continued recovering from March lows with the S&P/ASX 300 Accumulation Index returning 4.6%. The Healthcare and Consumer Staples sectors retreated -5.1% and -0.5%, respectively, with the remaining ASX sectors returning in positive territory: Information Technology (14.3%), Telecommunication Services (8.5%), Materials (8.4%), Consumer Discretionary (6.9%), Financials (5.3%), Energy (4.7%), Industrials (3.8%) and Utilities (3.1%).
The RBA met at the beginning of June, maintaining the cash rate at 0.25%. Governor Lowe noted the severe global economic downturn, the rise in unemployment, and the requirement for government support via fiscal packages and easy monetary policy. Despite the severity of the impact of COVID-19 in Australia, the RBA explored the possibility that the extent of the downturn will be “less than earlier expected” in Australia, with the rate of new infections declining significantly, and positive signs in both hours worked and consumer spending. The RBA reiterated its “whatever is necessary” stance, and is committed to supporting “jobs, incomes and businesses” to ensure Australia is positioned well for a recovery.
The Ai Group Australian Manufacturing PMI increased to 41.6 from 35.8 in April, noting it still remains in contractionary territory. The Australian listed property market rose by 7.1%, as measured by the S&P/ASX 300 A-REIT Accumulation Index, outperforming the broader market index by 2.5%.
Major global bond yields were mixed in May, with the Italian 10-year Government bond yield falling by 29bps to 1.5%, the UK 10-year Government bond yield falling by 5bps to 0.18%, and the Australian 10-year Government bond yield falling by 1bps to 0.9%. The German 10-year Government bond yield rose 14bps to -0.4% and the U.S. 10-year Government bond yield rose 2bps to 0.6%,
The Australian dollar made further gains against the USD, with a 2.4% rise in May to 66 US cents. The Trade Weighted Index closed at 58.8 for the month, up from 57.8, illustrating the appreciation in the AUD against the currencies of its major trading partners.
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