Trade fears and global tariffs were the focus of global markets attention in May with the realisation that a US-China trade resolution was not imminent and could escalate further. Accompanying global concern of trade, UK markets continue to contend with an unstable political backdrop. Following the resignation of Prime Minister Theresa May, the perceived risk of a ‘No deal’ Brexit increased, consequently it is unsurprising that over the month Sterling declined 3% against the US Dollar to 1.26 ($ to GBP), within 5% of its low in 2017. The FTSE All Share index decreased 2.2% in May, resulting in a total return of -2.7% for the last twelve months. The more domestically focussed FTSE 250 (excl. Investment Trusts) declined 3.6% in during the month, with the larger, more internationally focussed FTSE 100 index declining 2.1%.
Global equity indices are heavily weighted (>60%) towards US companies. The US dominance of the global index is shown in the performance figures over the past year for the MSCI World index returning 5.3% compared to the MSCI World ex US index returning -0.2%, in Sterling terms. As US equity markets declined from their highs of April, in the realisation that the proposed tariffs between China were becoming ever more a reality, President Trump delivered a coup de grace towards the end of the month by announcing that goods from Mexico would be subject to a 5% levy beginning on June 10. These tariffs, which would affect all imports, will rise 5% a month to 25% in October, unless action was taken on the migration “crisis” between Mexico and US. The S&P 500 fell 6.5% over the month in US Dollar terms, with Energy and Information Technology sectors leading the decline. The yield on US Treasury 10 Year bond collapsed to 2.09% at month end, from 2.51% at the end of April, as investors looked for safety and priced in US Federal Reserve rate cuts. In a move not seen since the summer of 2007, the US Treasury Yield curve inverted further with 1 month bond yielding 2.35%, a +0.26% difference from the 10 year.
Government bond prices also rose in Germany, driving in the 10 year government bond to a negative yield of -0.21%, from 0.01% at the start of the month. Conversely the Italian 10 year bond yield rose to 2.61% from 2.55% and now yields more than Greek debt, reflecting the concerns investors have over Italy’s coalition government negotiation with the European Commission over its debt levels. The MSCI Europe ex UK index fell -5.1% in Euro terms, with the main stock indices in Germany, France and Spain all decreasing over 5% and Italy over 7%, leaving the MSCI Europe ex UK total return over the past year at 1.1%.
Global trade fears weighed heavily on Asian markets, with the Shanghai and Korean stock exchanges declining over 7% in their respective currencies, leading to the MSCI AC Asia Pacific ex Japan index to post a -6.2% return for the month, (-3.8% in Sterling terms), with 1 year return at -3.7%. MSCI Japan similarly fell -6.4% in Yen, (-0.7% in Sterling) and is one of the worst performing regions for sterling investors over the past year, with the index down -10.0% over the period. Japan also offered investors its first ‘junk’ bond in May. The bond was offered with an interest rate of 0.99%, highlighting the clamour for yield in the country that has had negatively yielding government debt since 2016. MSCI Emerging Markets index was the worst performing regional index in May, falling 6.6% in local currency (-4.1% in Sterling terms), resulting in a 1 year total return of -3.6%.
Risk assets globally were affected by the macro environment and after inventory data revealed that oil stockpiles were at elevated levels, Brent crude oil declined to below $62 per barrel, a fall of 12.7% over the month. Gold, a perceived safe haven asset, benefitted from the equity market sell off with the price closing at $1,305 per ounce at month end, up 1.7% in US dollar terms for the month, 1.8% year to date.