May – A Volatile Month With 2 Tales To Tell
May has been a volatile month. Europe’s sovereign debt risks and tensions in Korean Peninsular weighs down heavily on the financial markets while economic data has shown that the recovery is underway.
Speculation and intense debate on 2 issues, whether Greece will be forced to default and whether Euro will lose some of its weaker member countries has died down a little. However, things are still not certain a month after attacks lead to a trillion dollar bailout package. Euro skeptics say the forced spending cuts and tax increases will scuttle a recovery before it takes hold. The fiscal austerity measures will be a big drag on growth. Spain lost its AAA credit grade at Fitch Ratings, dropping one step to AA+ to a “stable” outlook.
Stoxx Europe 600 Index, measure of stocks in countries using Euro fell 6.1 percent, the biggest drop since February 2009 and to the lowest since August 2009 before recovering. The decline has left stocks near the cheapest valuation since 2008, according to Bloomberg data.
Euro plunged against the dollar in two weeks amidst European Union’s nearly trillion-dollar bailout for debt-saddled members. Mid into the month, reports stating China was reviewing its Euro holdings, causing further damage to financial markets and confidence. Chinese officials have declared this “groundless” and stated that as a long-term investor; the nation’s $300 billion sovereign wealth fund will maintain its investments in the euro region
Analysts cite the economic boost a weaker currency provides. The advantage of the Euro drop is it will continue to support the recovery now that German exports and Spanish and Greek vacations become cheaper for Americans and Asians. The benefit is especially significant if the Euro is depressed a year or more.
The fiscal discipline that comes as a condition of the rescue package will also benefit European economies after the initial pain of government spending cuts and tax increases. South Korea and Indonesia are some precedents that flourished after the Asian currency crisis of the late 1990s ushered in budgetary restraints and financial reforms.
The attack on the euro may end later this year as more investors begin to believe in Europe’s fiscal discipline and economic activity.
U.S.
The S&P 500 has slumped 10 percent in May, poised for its worst month since February 2009, though most economic data shows positive news.
A U.S. Labor Department report show the number of Americans filing for jobless claims fell last week to 455,000 from 471,000, according to the average economist estimate in a Bloomberg survey. Payrolls climbed by 508,000 workers last month, the biggest increase since 1997.
Purchases of new homes jumped in April to a two-year high and orders for durable goods climbed the most in three months, signaling the U.S. economy strengthened before the crisis of confidence in Europe.
Employment grew in May for a fifth consecutive month, pointing to gains in wages that will help U.S. households ride out the turmoil in financial markets.
Manufacturing in the U.S. expanded in May for a 10th month as factories boosted payrolls to keep up with rising sales here and abroad.
Markets stabilized during the last few days of the month, from a plunge that has depressed MSCI Asia Pacific Index, a regional stock benchmark by 7.5 percent in May.
There are differing views on whether the financial market is entering into a bear market, or a correction in an ongoing bull market. “Markets don’t move in a straight line, and strong data does underpin the stronger fundamentals for Asia,” said Robert Reilly, co-head of Asian fixed income and currencies-flow in Hong Kong at Societe Generale SA. Templeton Asset Management Ltd.’s Mark Mobius said he has been buying stocks in Brazil, Russia, India and China in the past month.
The Index on 25th had its lowest close in a year as concern about Europe’s debt crisis and tensions on the Korean peninsula deterred investment in Asia’s emerging markets.
The Index has tumbled 13 percent from this year’s high on April 15 on concern some European countries will struggle to shrink budget deficits.
China needs a property crash for stocks to return to a bull market because that would jolt investors into switching money to equities, former Morgan Stanley economist Andy Xie said. “The property market is sucking in all the money,” said Xie, who correctly predicted in April 2007 that China’s equities would tumble. “Without the property market crashing” a bull market in stocks is “unlikely.”
The nation’s stocks have been among the world’s worst performers this year, with the Shanghai Composite Index entering a bear market on May 11 after falling 20 percent from a Nov. 23 high.
Faster Growth and Better Economic Data
While the financial markets suffered, most of the economic data has been positive.
Growth in Asian economies is outpacing the rest of world, prompting central banks in the region to begin raising interest rates as inflation returns.
China will expand more than 11 percent this year and India 8.3 percent, while the U.S. economy will grow 3.2 percent and the euro region will advance 1.2 percent, the Organization for Economic Cooperation and Development (OECD) said yesterday in a report. The projections highlight the divergence in the global economy after it emerged last year from its worst slump in more than half a century.
Japan’s exports increased for a fifth month, rising 40.4 percent from a year earlier in April, more than the 38.3 percent increase forecast by economists in a Bloomberg survey. The Bank of Korea reported a $1.49 billion current-account surplus for April and forecast inflows of $2.5 billion for this month.
Philippine economy grew at the fastest pace in three years, increasing 7.3 percent in the first quarter from a year earlier, compared with growth of 1.8 percent in the previous quarter. The expansion compared with the 4.4 percent median forecast of 15 economists surveyed by Bloomberg News.
Singapore’s industrial production grew at a faster pace than economists estimated, spurred by a surge in the electronics and pharmaceuticals industries.
Output at factories, which accounts for about a quarter of the economy, surged 51 percent in April from a year earlier, after a 46.6 percent surge in March, according to EDB. That’s the fifth straight month of growth.
Looking Forward
Europe will live through periods of slower growth that is sure. The idea of a V-shaped recovery is broken, more likely to be U-shaped now. Be prepared for a possible further correction of approx 5 to 8 percent. This year is likely to close at close to same level as it started or just slightly higher.
For investors who started within a year, this is a time to accumulate cheaper units. A full-fledged recession that warrants a 15 percent drop from this level is highly unlikely, given data. For investor with within 2 years time horizon, consider moving into safer assets.
MSCI Emerging Markets Index
Europe will live through periods of slower growth that is sure. If there is escalation in the European situation in form of a default or war in Korea, I will start doing some switching.
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