Global stocks posted a gain in May, even as emerging markets were engulfed in volatility and political developments in Italy triggered losses in Europe in the second part of the month.
The STOXX® Global 1800 Index rose 0.4% in dollars in the month,1 and jumped 4% in euros after the European currency dropped 3.4%.
Eurozone shares, however, sold off. The EURO STOXX 50® Index fell 2.5%. Italy’s UniCredit SpA paced the retreat as politicians readied the formation of a euroskeptic government, while investors also sold Deutsche Bank AG on concern about the German lender’s profitability. The pan-European STOXX® Europe 600 Index added 0.1%.
It was thus the US market that underpinned the global performance, as economic and corporate earnings data in the country continue to show a positive picture. The STOXX® USA 900 Index advanced 2.4%.
Headwinds to the rally
While the fundamentals of the global economy remain on firm footing, concerns have emerged this year about potential headwinds to the multi-year equity rally: the effect of rising interest rates, a potential trade war between US and partners, and geopolitical tensions in Korea and elsewhere.
During the month, the US administration moved to limit imports of goods to compensate for what, it says, are unfair trade practices.
Some emerging markets were hit by a run on their currencies, as investors sold shares in markets most vulnerable to rising US interest rates. The STOXX® Emerging Markets 1500 Index slid 4.6% in the month.
Markets tumbled towards the end of the month after Italy’s anti-establishment Five Star Movement and the right-wing Lega party presented the country’s president a proposal to form government. Investors pared some of the selling after the new government was approved on the solace that new elections were avoided.
Concerns linger, however, what attitude the new Italian government will have towards its fiscal commitments and towards a deeper integration of the European Union.
Expansion continues in US, Eurozone economies
Bulls had several economic reports to support their stance. The US Labor Department reported stronger-than-expected job creation, signaling that activity is expanding across sectors, while the unemployment rate fell to the lowest since 2000.
A measure of business activity in the Eurozone pointed to continued expansion in services and manufacturing, even if the reading has slowed down to the lowest in 18 months.
Another report in the month showed growth in U.S. consumer prices remains tempered, leaving room for the Federal Reserve to continue to raise interest rates at a moderate pace. Yields on 10-year Treasurys pulled back to 2.85% from 2.96% at the start of May.
During April and May, analysts boosted second-quarter earnings estimates for US companies by 0.2%, according to FactSet.2 It was only the second time since 2011 that earnings estimates increased over the first two months of a quarter.
Technology on top
The STOXX® Global 1800 Technology Index led gains among 19 supersectors in the STOXX Global 1800, rising 6.5% in dollars. It was followed by the STOXX® Global 1800 Basic Resources Index and the STOXX® Global 1800 Industrial Goods and Services Index, with respective advances of 2.6% and 1.8%.
At the bottom, the STOXX® Global 1800 Telecommunications Index slumped 5%. The STOXX® Global 1800 Banks Index retreated 4.5% and the STOXX® Global 1800 Insurance Index fell 3.9%.
Southern Europe on bottom
In national markets, Greece continues to display high levels of volatility. After topping all other 23 developed national markets tracked by STOXX in April, the STOXX® Greece Total Market Index came last in May when measured in local currencies. It dropped 13.6% as investors fled economies with high levels of debt.
The STOXX® Italy Total Market Index was May’s second-worst performer, shedding 7.8%.
The STOXX® Spain Total Market Index was the third-worst performer, with a 5.5% decline. Several members of the ruling Popular Party were convicted of corruption as the month drew to a close, leading to Prime Minister Mariano Rajoy losing a vote of no confidence on Jun. 1. It was the first time a Spanish head of government was ousted by Parliament in such a vote since Spain transitioned to democracy in 1977.3 Rajoy was replaced by the head of the opposition Socialist Party.
STOXX Total Market indices covering Ireland, Israel and Canada were the best performers in the month.
1 All returns include dividends net of taxes.
2 FactSet, ‘Q2 Sees Second Largest Increase in S&P 500 EPS Estimate Since 2011,’ Jun. 1, 2018.
3 Sky News, ‘Spanish PM Mariano Rajoy ousted in no-confidence vote amid corruption scandal,’ Jun. 1, 2018.