Markets defied the old adage of “sell in May and go away” by posting modest gains over the month of May. The US market recorded a healthy 2.2% return driven by a recovery in technology stocks such as Facebook which bounced back strongly from the negative sentiment associated with the data protection scandal that dogged the company in April.
Elsewhere, the UK also posted a 2.2% gain however, across the channel, markets in the EU were rocked by political events in Italy raising concerns about its financial stability. The Italian market fell by 9.2% dragging the Eurozone down by 4% only mitigated by the stability of the pivotal German market, which held steady.
The Australian market scratched out a small 0.5% gain building on the strong gains in April. Healthcare and consumer discretionary stocks led the way with CSL up 9.1% reflecting its phenomenal unbroken run of profit growth. On the downside Telstra fell 12% after disappointing the market with earnings guidance raising fears of further dividend cuts. The REIT sector was up 3% as local investors cashed out of Westfield following the successful completion of the takeover by Unibail-Rodamco and reinvested in other stocks in the sector.
The US bond market was fairly resilient with 10 year treasuries falling 9bp to 2.86% as annual wages growth remained steady at 2.6% despite strong employment numbers which saw the unemployment rate fall to just 3.9%. It now appears fairly certain the US Federal Reserve will raise rates by 0.25% in June and possibly twice more before the end of the year. Australian 10 year bonds followed in lock-step falling 9bp to finish at 2.67%.
The turmoil in Italy saw bond spreads against German bunds widen but to nowhere near the level seen during the European sovereign debt crisis in 2012, as can be seen in the chart below.
There was a mixed bag amongst commodities with the oil price pushing through $US 70 per barrel during the month after the US decided to pull out of the nuclear deal with Iran and re-impose sanctions on OPEC’s third largest oil producer. Iron ore fell marginally by 1.2%, however base metals were a standout with nickel up 11.3% on anticipated supply deficits based on strong forecast demand for stainless steel.
In currency markets, the US dollar was stronger against major cross rates reflecting its safe haven status in the wake of the turmoil in Italy as well as in emerging markets, such as Argentina, where interest rates were raised to a staggering 40% in an attempt to support the flagging peso. The AUD was 2.4% firmer against the EUR but flat against the USD.