United States 
Despite it being a holiday-shortened week, US equity markets continued to make good progress for the week ending 30 May. The technology-heavy NASDAQ was the best performer, returning 1.4%. The S&P 500 Index returned 1.2% while the Dow Jones Industrial Average increased 0.7%.
US real gross domestic product (GDP) contracted at an annual rate of 1.0% in the first quarter of 2014, following a downward revision of the original data. The slower growth was attributed to lower inventory adjustments. However, the report didn’t trouble investors, as growth is expected to bounce back in the second quarter. Home construction, car sales and retail sales have all recovered as the weather has improved.
May’s purchasing managers’ index data for the US services sector reached its highest level since March 2012, rising 3.4 points to 58.4. The results were strong across most of the areas surveyed, including new business, employment, order backlogs and business expectations.
Consumer confidence is also on the increase. The Conference Board consumer confidence index increased to 83.0 in May, up from 81.7 in April. The consumer sentiment reading from the University of Michigan was more mixed, however. May’s numbers were revised upwards from 81.8 to 81.9, but the final number was down from the 84.1 recorded in April, with slower wage growth cited as the biggest concern.
Personal income rose 0.3% in April, as expected, but nominal consumer spending fell 0.1%. The return to more typical weather led to a big drop in utility spending, while the boost to healthcare spending introduced by the Affordable Care Act appears to have decreased. Together, real spending on consumer services declined 0.2% in April, while total real consumer spending slipped 0.3%, following a modestly revised gain of 0.8% in March.
Pending home sales, seen as a useful barometer of future home purchases, edged higher in April, although the 0.4% increase was considered relatively modest and the pace of home purchases is still weaker than last year.
Initial jobless claims fell by 27,000 to 300,000 for the week ending 24 May. Weekly claims data is traditionally volatile at this time of year, but analysts are satisfied that the positive underlying trend is continuing.
Asia Pacific
The MSCI Pacific returned 1.2% in the week ending 30 May.
Japan’s TOPIX was the region’s best performer, up 1.8%. Consumer prices rose a stronger-than-expected 3.2% in April from a year earlier. Much of the increase in the rate in consumer price inflation was due to the coming into effect of a sales tax increase on 1 April, which led to an increase in the price of many commonly sold goods. Japan has been battling deflation—or falling prices—for nearly two decades, and the Bank of Japan has said that ending this cycle is key to stimulating economic growth.
Data released in the week confirmed that the sales tax rise weighed on consumer spending. Retail sales fell 4.4% in April compared with the same period last year, due to a decline in sales of cars and electronics. However, the International Monetary Fund said that it expects Japan’s economy to pick up in the second half of the year, which boosted sentiment.
Hong Kong’s Hang Seng rose 0.5%, led by gains in property developers, which were buoyed by signs that the Hong Kong government would relax curbs on housing.
Australia’s resource-heavy All Ordinaries returned 0.1%. Gold miners fell after the gold price dropped to its lowest level since February as investors re-assessed the crisis in Ukraine. The precious metal is viewed as a haven in times of geopolitical instability. Singapore’s Straits Times was up 0.5%.
Europe
The MSCI Europe Index rose 0.8% in the week to 30 May, with most European equity markets largely unaffected by the outcome of the European elections, which gave eurosceptic parties from both the left and the right of the political spectrum greater representation in the European Parliament (EP). The rise in eurosceptic sentiment was particularly strong in the UK, France and Greece.
Meanwhile, the stronger-than-expected performance of Italy’s centre-left Democratic Party under the leadership of prime minister Matteo Renzi provided a positive surprise, sending the FTSE MIB up 4.3%.
The German outcome was less of a surprise, with chancellor Angela Merkel’s Christian Democrat bloc winning the most votes, reaffirming the commitment of the population of Europe’s largest economy to the European Union (EU) and the single currency, and reflecting the popularity of chancellor Merkel. The German DAX rose 1.8%.
Elsewhere, Spain’s IBEX 35 rallied 2.3%, Sweden’s OMX Stockholm 30 and France’s CAC 40 delivered respective returns of 0.7% and 0.6%, and the UK’s FTSE 100 gained 0.4%. The Swiss SPI fell 0.1%.
While the European elections served to highlight popular discontent with developments at both the domestic and European levels, the policy impact of the increase in the number of eurosceptic members of the EP is set to be limited. In coming weeks, the focus is likely to shift to the discussions about who will succeed incumbent Jose Manuel Barroso as president of the European Commission (EC), the executive arm of the EU, which has far greater decision-making power at the European level than the EP.
There has been heated discussion about the prospect of Jean-Claude Juncker, the nominee of the centre-right European People’s Party—the grouping with the highest number of seats in the newly elected EP—becoming EC president. A proponent of further European integration, Juncker’s appointment is opposed by UK prime minister David Cameron, who wants a reformist at the helm that will not impede his party’s agenda on Europe.
The primary focus of markets, however, remains on the 5 June meeting of the European Central Bank (ECB) and the potential announcement of further monetary policy measures aimed at weakening the euro, spurring bank lending and boosting upward price pressures. At the very least, the ECB is expected to cut its refinancing and deposit rates, and potentially undertake another long-term refinancing operation (LTRO).
While consensus expectations are high, it is likely that the sum total of any new measures will amount to only an incremental shift in the ECB’s monetary policy stance.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.1% in the week to 30 May, amid mixed performance across markets and regions.
Russia’s RTS was down 2.3%, as ongoing fighting between pro-Russian separatists and government forces in eastern Ukraine fuelled geopolitical tensions.
Elsewhere in emerging Europe, the Czech PX rose 3.0%, Hungary’s BUX was up 0.4% and Poland’s WIG fell 0.7%.
The MSCI China slid 0.2%. Premier Li Keqiang gave hints of further mini-stimulus measures to support the economy, suggesting actions he described as “timely and moderate pro-cyclical fine tuning.” Manufacturers of electric cars performed well after president Xi Jinping called on automakers to step up efforts to develop clean energy vehicles. However, Chinese equities were dragged lower by the weaker performance of start-up companies after the announcement of stricter regulation on fundraising activity by small businesses.
Reversing the positive trend from the previous week, India’s Sensex fell 1.9%. Following the recent election of Narendra Modi as prime minister, markets are now awaiting plans to revive India’s economy, particularly to tackle food price inflation, the lack of jobs and poor infrastructure.
South Korea’s KOSPI fell 1.1%, as industrial output for April rose at a much slower pace than expected.
Returns in Latin America were mixed. Argentina’s Merval returned 3.6%, after the economy minister announced a significant rise in the primary budget surplus, on account of a revenue increase. Mexico’s IPC dropped 1.3%, following disappointing private sector credit growth. Brazil’s Bovespa was down 2.6%. Data released confirmed the economy grew just 0.2% in the first quarter as investment dropped sharply.
Bonds & Currency
US Treasuries and government bonds across Europe rallied, due in large part to expectations about central bank monetary policy action. With the European Central Bank widely anticipated to announce new measures at its 5 June meeting, borrowing costs across European governments have fallen and the euro has depreciated meaningfully.
Credit spreads tightened in most markets, with high yield debt among the best performers.
*Source: J.P. Morgan Asset Management
