May 2018 Monthly Market Review

In the US, growth remains healthy. Extraordinarily strong earnings momentum, cor- porate tax cuts and fiscal stimulus underpin our positive view. Key early warning in- dicators for the economy continue to paint a positive picture of the growth outlook.

European data was more mixed. The labor market still looks strong, and eurozone unemployment fell to 8.5{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in April 2018. This is supporting consumer confiden

The UK showed a rather puzzling combination of very strong employment data and yet relatively weak business sentiment. GDP grew by just 0.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in the first quarter.

Positive data are improving global growth, with solid earnings. Any yen appreciation would be a risk.

The economic backdrop is encouraging. China’s growth and corporate earnings are solid.

The anti-establishment alliance between Italy’s populist Five Star Movement (Movimento 5 Stelle) and Northern League party (Lega Nord) seems to have left the Italian financial markets somewhat unsettled, most likely due to the Eurosceptic stance of these two parties. The parties formed a coalition government, naming an academic and political novice, Giuseppe Conte, as prime minister. It was a month characterized by investor uncertainty amid political deal making and calls for impeaching Italian President. As a result, Investors fled Italian stocks, and bond spreads widened. It’s also likely the new government will have a confrontational attitude toward Europe and Germany.

The political situation in Italy is likely to remain relatively calm for the next few months, but the key risks have not gone away. The new proposals by Italian populist parties concerning the Euro and anti-immigration measures could lead to further clashes with the EU. Investors were also scared that populist sentiment elsewhere in the eurozone could threaten the long-term survival of the euro, strengthened by the events in Italy.

European stocks have underperformed global stocks in the last month (May 2018). Political uncertainty could slow down economic activity and investments, weighing on European earnings expectations. The labor market is growing and unemployment in the euro area has fallen to 8.5{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in April 2018. This is supporting consumer confi- dence, which remains close to a maximum of 17 years. However, concerns about global trade and higher oil prices seem to be weighing on corporate sentiment. The eurozone manufacturing purchasing managers’ index (PMI) index for May 2018 declined for the fifth month in a row. The core inflation, at 1.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}, still remains below the target (2{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205}) of the European Central Bank (ECB). This mix of information with slow growth, low inflation and geopolitical tensions should keep the ECB firmly in accommodative mode.

The UK showed mixed economic data over the last month (May 2018) , with very strong employment data and yet relatively weak business sentiment. GDP grew by just 0.1{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in the first quarter. Weaker growth and ongoing uncertainty about the future of the Brexit negotiations kept the Bank of England on hold at its May 2018 meeting. Only two members of the MPC (Monetary Policy Committee) voted for a rate hike, while seven members voted for no change.

Many events have influenced the global stock market European policy,and commercial concerns.Trade tensions rose as the U.S. announced it would implement tariffs on $50 billion of Chinese imports and impose steel and aluminum tariffs on imports from Canada, Mexico and EU. The U.S. allies also announced retaliatory tariffs. Continued volatility in oil prices played a significant role. an increase in production by the US and Russia, and news about strife among OPEC (Organization of the Petroleum Exporting Countries) members contributed to further price declines in the end of the month.

In the US, technology shares performed well, with a positive growth of the Nadaq index, while financial stocks struggled as a sharp decrease in longer-term Treasury yields led to investor worries about bank profitability. The first quarter saw record profits, with an S&P 500 earnings per share growth of 24{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} year-on-year supported by the positive effects of growth and tax cuts.

The manufacturing PMI increased in May 2018, indicating an acceleration in the pace of activity into the second quarter. The May 2018 employment report showed continuing strength in the labour market and supported stocks. The government report said that the economy added 223,000 jobs last month. The unemployment rate declined to 3.8{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} from 3.9{3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} in April 2018. It is expected that the Federal Reserve will continue raising the rate in quarterly increments of 0.25 {3b9eaf6c7ab409934c5212d9535d0f35d0c1cd4f401895cadd46c9f70b681205} until the job growth trend weakens substantially. Positive economic indicators should lend support to second-quarter GDP expansion.